Category: infrastructure software

Profiting from the battle for the datacenter

Brenon Daly

Contact: Brenon Daly

Although the battle between Hewlett-Packard and Cisco Systems over outfitting datacenters is still playing out, some winners have already emerged. First and foremost, the shareholders of 3Com have benefitted tremendously from the turf war between the two tech titans. On Wednesday, HP said it is picking up 3Com for $3.1bn, bolstering its ProCurve lineup with 3Com’s switches and routers, which are Cisco’s core products.

Terms call for HP to hand over $7.90 in cash for each share of 3Com. That’s roughly 50% higher than 3Com shares garnered in an unsuccessful buyout two years ago and nearly four times the price of 3Com stock just one year ago. Additionally, it means that anyone who bought shares in 3Com over the past half-decade will be above water on their holdings when the sale to HP closes in the first half of next year. We can’t say that we’ve seen many situations like that in recent transactions. In most cases this year, the sale prices of public companies – particularly those that have faded in recent years, like 3Com – have been below the market prices they fetched back in 2007. And that was before any takeout premium.

But there are other parties that stand to come out ahead in the HP-3Com deal, as well. We have to imagine that the bankers at Goldman Sachs are glad (if not relieved) to have their client, 3Com, looking likely to have finally been sold. Goldman was advising the networking vendor back in 2007 on its proposed sale to Bain Capital and Huawei Technologies, which dragged on for a half-year before being scuttled due to national security concerns. There are success fees and then there are well-earned success fees.

Meanwhile, on the other side of the desk, Morgan Stanley also has reason to celebrate its work with HP. Not only is the pending purchase of 3Com the largest enterprise networking transaction since mid-2007, but the deal continues a strong recent run by Morgan Stanley. This week alone, the bank advised HP on its $3.1bn purchase of 3Com, AdMob on its $750m sale to Google and Logitech on its $405m acquisition of LifeSize Communications. Altogether, that means Morgan Stanley has had a hand in three of the four largest deals this week.

Nordic freeze-out for Cisco

Brenon Daly

Contact: Brenon Daly

With a fat treasury and well-drilled deal team, Cisco Systems typically storms through acquisitions. Over the past five years, the networking giant has announced some 50 purchases, including more than a few that combined big money and quick moves. (For instance, several sources have indicated that Cisco snatched WebEx Communications away from IBM in just a week, after Big Blue had the online conferencing company all but locked up.) But it appears that something in Cisco’s M&A methods has been lost in translation in its reach across the Atlantic for Norway’s Tandberg.

A little over a month ago, Cisco announced plans to hand over $3bn in cash for Tandberg, as a way to bolster its videoconferencing lineup. Although Tandberg’s board of directors backed the offer, a fair number of shareholders have balked at what they see as Cisco’s low-ball bid. Critics point to the fact that Cisco’s all-cash offer values Tandberg just 11% higher than the company’s closing stock price the day before the announcement. (We noted recently that the premium was just half the amount that Cisco is paying for Starent Networks, which was announced a week after Tandberg.)

Further complicating Cisco’s play for Tandberg is the fact that 90% of shareholders at the Norwegian company have to agree to the deal. Already, holders of about one-quarter of Tandberg equity have said they won’t support Cisco’s proposed purchase – at least not at its current valuation. We suspect that Cisco may well end up having to reach a bit deeper to land Tandberg. (The company gave itself more time on Monday, bumping back the expiration of its tender offer for Tandberg until November 18.) And as the standoff drags on, other vendors are closing their own videoconferencing deals. On Wednesday, Logitech said it will spend $405m in cash for LifeSize Communications. Logitech’s bid values LifeSize at slightly more than 4x trailing sales, which is not out of line with Cisco’s bid for Tandberg of 3.6x trailing sales.

It wouldn’t be surprising to see Cisco top its existing offer for what’s undoubtedly a valuable asset. Tandberg would give Cisco a solid mid-level videoconferencing offering, slotting nicely between its high-end Telepresence product and the low-level Web conferencing and collaboration offering it got when it picked up WebEx. In terms of markets, adding Tandberg would significantly expand Cisco’s reach in Europe, particularly with government customers. And as a bonus, securing Tandberg would prevent the target from landing with rival Hewlett-Packard, which has its own videoconferencing wares. (Although HP actually beat Cisco to market with its Halo product, it has little to show for its early advantage.) We doubt that would happen, but wouldn’t it be a kicker if HP pulled a Cisco on Cisco, quickly firing off a topping bid and walking away with Tandberg?

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.

Microsoft pals up with Opalis?

Brenon Daly

Contact: Brenon Daly, William Fellows

Having already seen a trio of notable runbook automation (RBA) startups get snapped up by major tech players, we’re now hearing buzz about another pairing. Word is that Microsoft has snagged Opalis Software for about $60m, according to both financial and industry sources. Opalis, which has raised $25m in venture backing, is thought to be running at about $10m in revenue – a much higher level than its rivals at the time of their acquisitions. Current CEO Todd DeLaughter is the former head of Hewlett-Packard’s OpenView division.

The rumored deal comes more than two years after a pair of high-multiple RBA pickups put the focus on the sector, and a year since the industry’s most-recent significant transaction. In March 2007, Opsware (now part of HP) spent $54m in cash and stock for iConclude, and four months later, BMC paid $53m for RealOps. Both iConclude and RealOps had only just started to produce any revenue at the time of their respective purchases. And exactly a year ago, CA Inc reached for Optinuity, which we understand was also generating sales in the low single digits of million of dollars.

As that wave of consolidation swept through the RBA market, Opalis positioned itself as an independent alternative to the offerings from the system management giants. Of course, that would be lost if the company does indeed end up belonging to the Redmond behemoth. It wouldn’t be surprising if Microsoft does announce the deal. We understand that the company had a preliminary look or two at Optinuity before that startup sold to CA a year ago. More significantly, Microsoft and Opalis announced in late April a joint technology agreement that saw, among other things, Opalis integrated into Microsoft’s System Center Operations Manager 2007 and System Center Virtual Machine Manager 2008 consoles.

Is Riverbed floating toward a deal?

Brenon Daly

Contact: Brenon Daly

Riverbed Technology is one of those companies that has seemingly been in play for as long as it’s been around. And that’s understandable enough, given that the company has an attractive profile as the fast-growing leader in a market that’s taking off. Add to that the fact that Riverbed plays in the networking space, which is dominated by deep-pocketed giants hungry for growth, and acquisition rumors are inevitable. The most-recent would-be buyer for Riverbed? Juniper Networks.

Of course, Juniper is just the latest in a long list of rumored suitors. Cisco Systems is said to have made at least two runs at Riverbed before the company went public in September 2006. More recently, we heard that EMC also looked very closely at Riverbed before its IPO. (We understand that while EMC was seriously interested in Riverbed, Cisco effectively killed the deal by telling its partner EMC that it wouldn’t look kindly on the information management giant stepping into the WAN traffic optimization (WTO) market.)

And last summer, we noted that Hewlett-Packard would make a logical buyer for Riverbed. The two companies have had a long relationship with HP reselling Riverbed boxes and integrating the Riverbed Optimization System into its ProCurve infrastructure. (Not to mention that HP could stick it to its new rival Cisco by picking up Riverbed.) And several sources have pointed to talks in the past between F5 and Riverbed. We suspect that would be a tricky combination because Riverbed’s current market capitalization ($1.7bn) is half that of F5’s market value ($3.5bn).

All of that leaves us with Juniper. However, we don’t think a deal between the two is likely. For starters, Juniper has already gone shopping once in the WTO market. It shelled out a princely $337m (most of it in stock) for Peribit Networks in April 2005. From Juniper’s perspective, the Peribit purchase gave the networking vendor a hot product to sell to its enterprise customers, many of which came via Juniper’s $4bn acquisition of NetScreen Technologies a year earlier. However, we wouldn’t hold out Peribit as a particularly successful transaction for Juniper. Certainly, it hasn’t generated the type of returns for Juniper that would make the company want to double down with a multibillion-dollar bid for Riverbed, we would think.

Out with the old and in with the new at Compuware

Brenon Daly

Contact: Brenon Daly

Deal flow at Compuware so far this year has been out with the old and in with the new. The 36-year-old company sold off its testing automation and software quality business to MicroFocus for $80m earlier this year, and then last week, it put some of those proceeds toward covering its $295m purchase of Gomez. (Interestingly, Updata Advisors worked both the divestiture and acquisition for Compuware.)

The purchase of Gomez significantly bolsters Compuware’s application performance management (APM) business. It also dramatically changes the face that Compuware shows to Wall Street. Most investors know Compuware – if they know it at all – as ‘a mainframe company.’ (Indeed, roughly two-thirds of the firm’s product revenue comes from its mainframe business.) Even in a robust IT spending environment, the mainframe business is a slow-growing one.

While only a small slice of overall revenue, Gomez brings a predictable base of subscription revenue that’s been growing at a pretty good clip recently. In the first two quarters of 2009, Gomez increased revenue 25%. Granted, Compuware paid for that growth, valuing Gomez roughly four times as richly as Wall Street currently values Compuware itself. But the fact that Compuware shares actually ticked higher when the vendor announced the acquisition indicates that the deal has some support. (In contrast to, say, Wall Street’s punishment of Xerox shares on that company’s plan to pick up ACS.)

And Compuware is essentially paying the prevailing market valuation (5.5x trailing sales) for an on-demand company in its reach for Gomez. Undeniably, the firm could have found any number of targets available at a sharp discount if it wanted to consolidate a bunch of mainframe software providers. After all, Compuware has some experience with M&A, having inked nearly 40 deals since it went public in 1992. However, we would argue that few of those transactions have been as forward-looking as the addition of Gomez.

Starent gets a bit more pop than most Cisco buys

Brenon Daly

Contact: Brenon Daly

Announcing its second multibillion-dollar acquisition in as many weeks, Cisco Systems said Tuesday that it will hand over $2.9bn in cash for Starent Networks. The pickup comes just after the networking giant’s reach across the Atlantic for Norwegian videoconferencing vendor Tandberg. Cisco is paying $3bn in cash for Tandberg. Both of the October purchases are expected to close in the first half of 2010.

As many echoes as there are between this pair of recent deals, there’s one significant difference: Cisco is paying a premium on Starent’s stock price that’s substantially higher than what it paid for Tandberg. In fact, Cisco is paying nearly twice the premium for Starent than it has paid in its other recent purchases of public companies. The bid of $35 for each Starent share represents a 42% premium over the closing price 30 days ago for shares of the wireless infrastructure provider. That compares to a 27% premium for Tandberg, a 21% premium for WebEx Communications and a 23% premium for Scientific-Atlanta. (All of those calculations are based on the closing prices of the shares of the target 30 days prior to the acquisition, which we feel is a more accurate snapshot of the company than the previous day’s closing price.)

And a final echo in today’s acquisition of previous Cisco deals: the advisers. Barclays Capital worked for Cisco, while Goldman Sachs Group banked Starent. That’s the same banks on the same sides as Cisco’s pickup of WebEx two-and-a-half years ago. Of course, that was before Barclays acquired Lehman Brothers, which actually got the print.

Rumor mill churning on CommVault

Brenon Daly

Contact: Brenon Daly, Henry Baltazar

To paraphrase Mark Twain, a rumor can travel halfway around the world while the truth is still putting on its shoes. At least that’s the case with M&A gossip right now. Rumors are flying, in many cases given wing by some of the unusual multibillion-dollar pairings that have popped up in recent weeks. Who would have thought, for instance, that Cisco would have gone shopping in Norway (of all places) to ink its largest deal in a year and a half? And who would have picked Dell as the buyer for Perot Systems? (Except for that guy who traded Perot options on inside information, that is.)

All uncertainty, of course, serves as fertile ground for speculation and rumors. Earlier this week, The Wall Street Journal reported that Brocade Communications may have selected a banker to help it with a sale. While we’ve noted in the past that Brocade is likely to get snapped up, we have our doubts that anything is imminent. (And we doubt even more that Brocade would ever end up at Oracle, as the WSJ speculated.) But since we love rumors as much as the next person, we figured we’d pass along one that we’ve heard making the rounds this week: CommVault may be in play, with NetApp as the possible buyer.

We’ve mulled over a CommVault-NetApp pairing in the past, most recently after the storage giant lost the bidding war for data de-duplication specialist Data Domain this summer. But we’ve never felt that the two companies fit tightly together all that well. (Still, one recent competitive development may spur NetApp to make a move. Symantec, which had been a longtime partner of NetApp, rolled out its own NAS software offering. To counter Symantec’s move on its turf, NetApp could use the archiving and de-dupe offering that would come with CommVault. Whether that’s enough to drive a deal, well, we’re not so sure.)

There are still a lot of differences between the two companies. For starters, CommVault pretty much sells straight software, while NetApp wraps its IP in hardware. (Further, its boxes are at least partly an alternative to CommVault’s offering.) Also, CommVault, while now targeting enterprise sales, primarily pursues the low end of the market while NetApp sells at the high end. Add to that a newly appointed chief executive who might want to actually move into the corner office before making an acquisition that would (for good or ill) reshape the company irrecoverably, and we just don’t see NetApp reaching for CommVault.

Instead, we have our own leading candidate for CommVault: Dell. On the heels of its purchase of Perot, Dell went out of its way to say that it was still very much planning to do deals, and storage has been a focus of its shopping in the past. CommVault and Dell already have an OEM arrangement and share thousands of customers. The fact that CommVault recently rolled out a relatively low-cost de-dupe offering would make it even more attractive to Dell, we suspect. CommVault, which is solidly profitable, has a market capitalization of $870m but holds about $120m in cash, lowering its enterprise value to just $750m.

Nuance adds to a shrinking business

Brenon Daly

Contact: Brenon Daly

The latest acquisition by serial shopper Nuance Communications is a bit of a blast from the past. On Monday, Nuance said it will hand over $54m in equity for eCopy in a move that bolsters its imaging business unit. (Revolution Partners banked eCopy while Needham & Co advised Nuance, as it did in the company’s purchase of SNAPin Software a year ago.) The pickup of eCopy, however, snaps a string of deals that Nuance has used to build out its mobile and healthcare business lines.

If you didn’t realize that Nuance had an imagining unit, you could be forgiven. Although the company has its roots in that technology, it has largely left that market behind. (The current Nuance is actually the product of a mid-2005 marriage of Nuance Communications and ScanSoft, the name of which should give you some idea of its business.) In fact, through the first three quarters of the current fiscal year, the imaging unit represents just 7% of Nuance’s total revenue.

And that slice is only getting smaller. So far this fiscal year, sales in the imaging unit shrank a staggering 20%, while the vendor’s other two divisions (mobile and healthcare) both grew and overall revenue rose 12%. Since the imaging business appears to be little more than an afterthought inside Nuance, we’re surprised to see the company double down on the unit with the eCopy acquisition. That’s actually a reversal of the direction of deal flow at the division that we would have suspected. We could certainly see a situation where Nuance divests its imaging business, ditching its past and focusing on mobile and healthcare for future growth.

‘She got the ring, I got the finger’

Brenon Daly

Contact: Brenon Daly

As every country and western crooner knows, relationships can build you up but they can also break you down. (Suggested listening: ‘I Fall to Pieces’ by Patsy Kline.) That’s as true in love as it is in business, as my colleague Kathleen Reidy notes in a new report. Specifically, she takes a look at the future for StoredIQ, which got dumped by EMC last month when the tech giant acquired rival company Kazeon for its e-discovery offering. (Suggested listening: ‘She Got the Ring (and I Got the Finger)’ by Chuck Mead.)

It was undoubtedly a big blow for StoredIQ, which had a longer-standing and deeper relationship with EMC than Johnny-come-lately Kazeon. EMC has been reselling StoredIQ under its SourceOne brand since 2008. But obviously, StoredIQ will be a bit of a third wheel following the Kazeon acquisition, and the relationship with EMC is effectively over. (Suggested listening: ‘If the Phone Don’t Ring, Baby, You’ll Know It’s Me’ by Jimmy Buffet.) While the official reason has never surfaced as to why EMC passed on StoredIQ in favor of Kazeon, we might chalk it up to the difficult task of parsing out revenue in any reselling agreement, and how to value those sales. That’s always tricky.

In any case, StoredIQ is moving on. (Suggested listening: ‘How Can I Miss You if You Won’t Go Away’ by Dan Hicks and His Hot Licks.) The eight-year-old startup has solid technology to identify and manage data that lives outside companies’ managed repositories, which is a key part of e-discovery. And StoredIQ may well be a good fit for Symantec, which also had a relationship with Kazeon and may now be in the market for a new partner. (Suggested listening: ‘I May Be Used (But Baby I Ain’t Used Up)’ by Waylon Jennings.)