Category: infrastructure software

Brocade on the block? Of course it is

Brenon Daly

Contact: Brenon Daly, Simon Robinson

Having recently marked the anniversary of its largest-ever acquisition, Brocade Communications may now find itself on the other side of a transaction. At least that’s the speculation from The Wall Street Journal, which reported Monday that the storage and networking giant has retained a banker (reportedly Frank Quattrone’s Qatalyst Partners) to shop it. While the report was enough to goose the stock to its highest level since June 2008 (shares were up 15% to $8.82 in Monday-afternoon trading), it’s worth pointing out that being shopped is a long way from getting sold.

It’s also worth mentioning that speculation about Brocade being in play is nothing new. As my colleague Simon Robinson noted in late March, the consolidating networking landscape makes Brocade a likely target. (After all, Brocade itself is an example of the consolidation. A traditional SAN networking provider, Brocade spent $2.6bn to expand into IP networking with its landmark purchase of Foundry Networks.) In the report, Robinson taps IBM as a likely buyer for Brocade as a way to gain an immediate presence in the networking space as well as strengthen its lead in the server sector. (Big Blue is one of the largest of Brocade’s OEM partners, which now number 23 companies.)

Hewlett-Packard is a less likely acquirer, in our view, because of the substantial overlap between HP’s newly reinvigorated ProCurve line and Foundry. That said, Brocade is a key supplier of datacenter infrastructure technology, so it is likely to be of interest to sever vendors like HP. Brocade’s appeal might be even sharper now that HP and Cisco Systems, which were once chummy, have found themselves on opposing sides in their efforts to equip the modern datacenters.

One additional buyer that certainly makes sense for Brocade, even more so because of a recently strengthened OEM arrangement, is Dell. The hardware provider, which has already bought its way into storage and other IT infrastructure markets, recently bolstered its OEM arrangement with Brocade to include IP networking and fiber-channel-over-Ethernet gear. (For the record, the WSJ article doesn’t mention Dell as a possible acquirer but, inexplicably, includes Oracle as a suitor. We suspect that Larry Ellison has plenty of other areas of software to consolidate before a hardware-heavy purchase that pits Oracle against Cisco.)

In terms of valuation, we would note that with the M&A-inspired speculative buying, Brocade shares have more than tripled so far this year. (Trading in Brocade stock through mid-Monday was already more than five times heavier than average.) The run has given Brocade an enterprise value (EV) of $4bn, including the jump on Monday. That values it at almost exactly the same level as Cisco on an EV-to-trailing-EBITDA valuation and a slight discount to the networking giant on an EV-to-trailing-sales multiple.

Starting strong, once again

Brenon Daly

Contact: Brenon Daly

For the second time this year, the first day of a new quarter brought with it a multibillion-dollar transaction. Back on April 1, Fidelity National Information Services opened the second quarter by announcing its $2.9bn all-equity acquisition of Metavante. (The deal closed yesterday.) And to start the fourth quarter on October 1, Cisco said it plans to spend $3bn in cash for Tandberg, the Norwegian maker of video and network infrastructure technology. The purchase, which is expected to close in the first half of 2010, should bolster Cisco’s TelePresence product.

Cisco’s reach for Tandberg stands as the company’s largest acquisition since it paid $3.2bn in cash for WebEx Communications in March 2007. The transaction also continues a flurry of recent deals. September came in with the highest spending of any month so far this year, with significant acquisitions announced by Xerox, Adobe, CA Inc and Dell, among others. In fact, September alone accounted for two-thirds of all M&A spending in the just-completed third quarter. (See our full report on the numbers and trends in the third quarter.)

Recent deal flow

Month Deal volume Deal value
September 2009 243 $22bn
August 2009 222 $4bn
July 2009 274 $9bn

Source: The 451 M&A KnowledgeBase

DLP deal flow

Brenon Daly

Contact: Brenon Daly, Steve Coplan

When Trustwave recently reached for Vericept, the Chicago-based security services company joined a long list of acquirers of data-loss-prevention (DLP) technology. Over the past three years, we’ve seen roughly a baker’s dozen DLP deals, with the total spending on the transactions hitting $850m, according to our 451 M&A KnowledgeBase. Not surprisingly, both the size and valuations of recent DLP deals have declined sharply, sinking to 1-2 times trailing sales, which is down from a high of about 10x trailing sales.

The list of buyers of DLP, which basically works to snuff out insider threats and control the flow of data, includes all of the obvious IT security giants. Symantec gobbled up Vontu for $350m in November 2007, while McAfee has taken smaller bites. It paid $20m for Onigma in October 2006 and then followed that up almost two years later with the $46m purchase of Reconnex. Additionally, Websense, CA Inc, RSA and even Raytheon have made sizeable DLP acquisitions in recent years.

If we had to guess which large security provider will go shopping next in the DLP space, Check Point would probably be our choice. The vendor, which is best known for its firewall offering, could use additional security on the network edge. Check Point also shifted earlier this year to an appliance model, where distinct software ‘blades’ cover specific security threats. Among other benefits, that makes it much easier to plug acquired technology into Check Point’s existing platform. DLP startups that might be of interest include Verdasys, GuardianEdge and Safend, among others.

Select DLP deals

Date announced Acquirer Target Target revenue Deal value
September 10, 2009 Trustwave Vericept $10m* $20m*
January 5, 2009 CA Inc Orchestria $22m* $30m*
November 5, 2007 Symantec Vontu $30m $350m
October 25, 2007 Trend Micro Provilla Not disclosed $15m*
September 20, 2007 Raytheon Oakley Networks $33m* $193m
August 9, 2007 RSA [EMC] Tablus $6m* $50m*

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

M&A market timing at CA

Brenon Daly

Contact: Brenon Daly

After a two-year hiatus that ended last fall, CA Inc has returned to the market with newfound enthusiasm. With the vendor’s purchase on Monday of network performance management provider NetQoS, CA has now inked six acquisitions over the past 12 months. That comes after an extended period (September 2006 to October 2008) when the normally acquisitive company stepped out of the market entirely.

During that time, CA’s four large rivals (BMC, Hewlett-Packard, IBM and Symantec) announced a total of 61 transactions between them. Collectively, the quartet of buyers paid roughly 5.7 times trailing 12-month (TTM) revenue in the deals they did. (That’s the median valuation from the more than 20 transactions that either had terms disclosed or where we estimated the numbers.)

So from CA’s perspective, sitting out a period marked by historically high valuations might not be a bad thing at all. Consider this: CA’s purchase of NetQoS cost it $200m in cash, which worked out to 3.6x TTM sales. If we slap the prevailing multiple from the period CA was out of the market (5.7x TTM sales) onto CA’s most-recent deal, the price for NetQoS swells to $320m. Obviously, there were vastly different assumptions about growth rates in late 2006 and early 2007 than there are now, which goes a long way toward explaining the nearly 40% ‘discount’ that CA got by inking the NetQoS purchase on Monday rather than when the market was hot.

Informatica: Just dating or something more?

Brenon Daly

Contact: Brenon Daly, Krishna Roy

Is it just dating, or are they looking to get married? That was a question that Wall Street was kicking around last week after Hewlett-Packard and Informatica announced a deeper relationship. The new accord sees HP licensing a number of Informatica’s offerings so that it can provide its customers with data management products. HP is also supplying these same wares from Informatica as part of its existing consulting services for business intelligence (BI) and related arenas and pushing these combined offerings through its direct sales force. (My colleague Krishna Roy has a full report on the tie-up.)

The announcement, which came out last Tuesday, didn’t initially generate much speculation about the relationship between the two longtime partners. However, by Friday, Wall Street was reading much more into the joint agreement. Shares of Informatica rallied almost 7% on Friday, with volume more than three times heavier than average. (The rally continued a strong run by Informatica, which has seen its shares gain some 56% so far this year, vastly outpacing the 32% advance for the Nasdaq in 2009.)

However, both HP and Informatica have taken great pains to position themselves as independent software providers. Indeed, even as HP announced that it would be doing more with its relationship with Informatica, it also clearly said that it will continue to work with other data management and BI vendors. And on the other side, we noted that ‘neutrality’ may have come up in rumored talks last year between Informatica and Oracle. In any case, the independence and openness stand in contrast to the moves in this market by IBM – the rival that’s the primary target of the deeper HP-Informatica partnership. Big Blue spent $1.14bn in cash in March 2005 for Ascential Software, an acquisition that most observers would say hasn’t delivered.

VeriSign’s bargain bin of deals

-Email Thomas Rasmussen

We’ve been closely watching VeriSign’s grueling divestiture process from the beginning. One year and $750m in divestitures later, VeriSign is largely done with what it set out to do. The company finally managed to shed its messaging division to Syniverse Technologies for $175m recently. Although we have to give the Mountain View, California-based Internet infrastructure services provider credit for successfully divesting nine large units of its business in about a year during the worst economic period in decades, we nonetheless can’t help but note that the vendor came out deeply underwater on its holdings. From 2004 to 2006 it spent approximately $1.3bn to acquire just shy of 20 differing businesses, which it has sold for basically half that amount. (Note that the cost doesn’t include the millions of additional dollars spent developing and marketing the acquired properties, nor the time spent on integrating and running them, which undoubtedly hurt VeriSign’s core business.)

Aside from the lawyers and bankers, the ones who really benefitted from VeriSign’s corporate diet were the acquirers able to pick up the assets for dimes on the dollar. And in most cases, the buyers of the castoff businesses were other companies since the traditional acquirers of divestitures (private equity firms) were largely frozen by the recent credit crisis. The lack of competition from PE shops, combined with the depressed valuations across virtually all markets, means the buyers of VeriSign’s divested businesses scored some good bargains. Chief among them are TNS and Syniverse, which picked up the largest of the divested assets, VeriSign’s communications and messaging assets, respectively. Wall Street has backed the purchases by both companies. Shares of TNS have quadrupled since the company announced the deal in March, helped by a stronger-than-expected earnings projections this year. More specifically, Syniverse spiked 20% on the announcement of its buy, which we understand will be immediately accretive, adding roughly $35m in trailing 12-month EBITDA.

VeriSign’s divestitures, 2008 to present

Date Acquirer Unit sold Deal value
August 25, 2009 Syniverse Technologies Messaging business $175m
May 26, 2009 SecureWorks Managed security services $45m*
May 12, 2009 Paul Farrell Investor Group Real-Time Publisher Services business Not disclosed
March 2, 2009 Transaction Network Services Communications Services Group $230m
February 5, 2009 Sinon Invest Holding 3united Mobile Solutions $5m*
May 2, 2008 MK Capital Kontiki Not disclosed
April 30, 2008 Melbourne IT Digital Brand Management Services business $50m
October 8, 2008 News Corporation Jamba (remaining 49% minority stake) $200m
April 9, 2008 Globys Self-care and analytics business Not disclosed

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

NICE Systems double-dips on deals

Brenon Daly

Contact: Brenon Daly

Less than three months after indicating that it was looking to step back into the M&A market, NICE Systems announced two deals back-to-back. The Israeli company reached for Hexagon System Engineering on Monday, and followed that up immediately with the much more substantial purchase of Fortent. Together, the transactions run NICE’s tally of acquisitions to a baker’s dozen since 2002.

Hexagon will add location-based services technology for cell phones to NICE’s portfolio. NICE will hand over $11m in cash for Hexagon, which we estimate was generating revenue in the low single digits of millions of dollars. As an aside on this deal, we would note that it marks the first time that NICE has shopped in its home market. (Although Actimize, NICE’s largest target, was founded in Israel and still does much of its R&D there, Actimize had moved its corporate headquarters to New York City several years before NICE picked it up.) In its other acquisitions, NICE has been a bit of a globetrotter, buying companies based in Australia, the Netherlands, Germany, the UK and the US.

Meanwhile, NICE (through its Actimize subsidiary) will pay $73.5m in cash for Fortent. We estimate that Fortent was running at about $30m in revenue, with most of that coming from sales of its anti-money-laundering (AML) product. Actimize competed with Fortent in the AML market, but also offers products for fraud detection and trading compliance. Actimize, which NICE acquired in July 2007 for $280m, has now inked three deals as part of NICE. The Actimize business, combined with Fortent, is expected to top $100m in revenue next year, roughly triple where it was when NICE bought it two years ago.

Increasing cloudiness

Brenon Daly

Contact: Brenon Daly

Just three weeks after VMware inked its company-defining acquisition of SpringSource, the virtualization kingpin is throwing the doors open on its annual VMworld conference today. (We can only hope that those attending the get-together found it smoother than those trying to access the conference through the website. For much of Monday morning, pages on the VMworld site were unavailable due to ‘temporary maintenance.’ With our tongue planted firmly in cheek, we might suggest that they need to add some additional server capacity.)

Although known primarily for its virtualization software, VMware’s purchase of SpringSource indicates that it sees much of its future growth coming from ‘cloud computing.’ To show just how serious the company is taking this, consider that VMware is spending roughly twice as much on SpringSource as it spent, collectively, in the dozen deals it had done before picking up the open source application development startup. The VMware-SpringSource transaction is also, we would argue, the most important cloud computing deal so far.

As a concept, cloud computing is a relatively new term, but one that has caught on strongly in the tech industry. Consider that a search of ‘cloud computing’ in our 451 M&A KnowledgeBase returns 36 deals already this year, up from just eight transactions in all of 2008. Before last year, there were no instances of the term in our M&A database, which has more than 20,000 technology deals going back to the beginning of 2001.

Of course, some of that can be chalked up to the fact that cloud computing is a pretty vague and sprawling term, covering everything from infrastructure management to storage to security to hosting and other areas. To help get some clarity around what can be an otherwise opaque topic, The 451 Group will be hosting its own conference on Thursday called ‘Cloud in Context.’ The half-day event in San Francisco will feature end users discussing working in the cloud, innovative startups and (for the first time ever) the release of our own estimates and projections for the cloud computing market. More details on ‘Cloud in Context’ can be found at the conference website.

Red Hat rumors: a reheat or something more?

Brenon Daly

Contact: Brenon Daly

When VMware reached for SpringSource earlier this month, the $420m pairing represented the largest open source transaction in a year and a half. Now, the market is buzzing with rumors about another blockbuster open source deal, one that would be more than 10 times the size of VMware-SpringSource. Several sources have indicated that interest in Red Hat has been heating up lately, with Oracle and IBM popping up again as suitors.

The rumors, of course, are nothing new. We have been speculating about a possible pairing between Red Hat and IBM or Oracle for almost three years. (When Oracle launched its own support of Linux back in 2006, we wondered if it wasn’t a ‘beat ’em down and take ’em out’ strategy from the coldhearted Larry Ellison.) And when the rumblings surfaced again earlier this year, we did some back-of-the-envelope thinking about a bid from Oracle. Honestly, though, we think Big Blue is a more likely buyer for Red Hat.

While the speculation stays largely the same, however, there is one change: the price of Red Hat keeps going up. Since we noted the latest reports of Oracle’s interest in late March, shares of Red Hat have tacked on about one-quarter in value. The company currently sports a market capitalization of $4.2bn; however, its cash holdings lower the effective purchase price to about $3.5bn. Red Hat is just now wrapping its fiscal second quarter, and has already said it expects revenue to be about $179m for the period. The vendor will likely report results in about a month.

Where’s the hurry in Oracle’s reach for Sun?

Brenon Daly

Contact: Brenon Daly

Having gotten the all clear on this side of the Atlantic, Oracle is now waiting for the EU to sign off on its pending purchase of Sun Microsystems. And the company will have to wait a bit longer. The European Commission has a deadline of September 3 to determine if the deal would violate antitrust measures. If the body decides that it does, a subsequent probe could potentially drag on into 2010.

Granted, there’s a lot at stake in Larry Ellison’s plan to use the acquisition of Sun to turn Oracle into a systems vendor, as opposed to a company that just sells software. (Provided the transaction goes through, Oracle will be in a position to hawk Solaris and Linux servers, all running its own database, middleware and application software on the boxes.) And, as the largest tech buy since Hewlett-Packard purchased EDS in May 2008, Oracle’s $7.4bn reach for Sun is clearly not nickel-and-dime M&A.

But the pace of the review by regulators is absolutely glacial. Consider this fact: It took Oracle just two months to fully negotiate its purchase of Sun, according to proxy material. (Sun chairman Scott McNealy spoke with Ellison about a possible deal in late February; the companies announced the transaction on April 20.) More than twice that amount of time has elapsed since Oracle announced the deal – and regulators in Europe are still mulling it over.