Category: infrastructure software

Sourcefire: No sale turns into a great deal

Brenon Daly

Contact: Brenon Daly

With Barracuda Networks looking to gobble up Austrian IT security vendor phion, we thought we’d look back on the other time the rapacious privately held firm eyed a public company. Last summer, Barracuda launched an unsolicited bid for Sourcefire, initially offering $7.50 per share but later raising that to $8.25. The bumped-up bid valued Sourcefire at roughly $215m, but that wasn’t enough for Sourcefire’s board of directors.

We’ve noted in the past that the decision by a company to go it alone can prove very costly to shareholders, at least in the near term. Removing the takeout premium and letting a company trade on its own fundamentals can end up crushing a stock. Recovering that lost ground can be a long and painful process. (Just ask shareholders of Yahoo and Mentor Graphics, who see shares in those companies changing hands these days at just half the level that suitors were willing to pay for them last year.)

However, it’s a completely different story for Sourcefire. It has actually turned out to be one of those rare cases where a target says a bid ‘undervalues’ the business and Wall Street agrees. After telling Barracuda to buzz off, Sourcefire shares got dragged down by the recession and traded below the bid until early April. But since then, the stock has surged to its highest level since the vendor went public in March 2007. Sourcefire shares are currently trading at about $20, or nearly 150% higher than the price Barracuda was willing to pay for them. Looked at another way, Sourcefire’s decision to stay independent has created more than $300m of additional value for its shareholders than the Barracuda bid would have delivered.

VMware: a ‘table-clearing’ bid for the clouds

Brenon Daly

Contact: Brenon Daly

About a year and a half after Paul Maritz got picked up by EMC, the former Microsoft honcho has struck his signature deal for his new employers. When EMC reached for Pi Corp, which had yet to release a product, we figured the move was basically ‘HR by M&A.’ And that has turned out to be the case, as Maritz took over leadership of EMC’s virtualization subsidiary VMware in July 2008. He stepped into the top spot just as VMware’s once-torrid revenue growth had dwindled to a trickle. Sales at VMware rose 88% in 2007 and 42% in 2008, but are projected to inch up just 2% this year.

To help jumpstart VMware’s growth, Maritz looked to the clouds, pushing through the acquisition of SpringSource earlier this week. At roughly twice as much as VMware has spent on its previous dozen deals, the SpringSource buy is the virtualization kingpin’s largest purchase. It was also, as we understand it, a deal very much driven by Maritz. (Because the purchase topped $100m, it also had to be blessed by VMware’s parent, EMC. This indicates that Maritz enjoys a level of support at the Hopkinton, Massachusetts, HQ that probably wasn’t extended to his predecessor, VMware founder Diane Greene.)

As we have noted, no bankers were involved in negotiations and one source indicated that terms were hammered out directly by Maritz and his counterpart at SpringSource, Rod Johnson, in a scant three-and-a-half-week period. Not that there was much negotiating needed. As we understand it, Maritz approached Johnson with a ‘table-clearing’ offer of $400m. SpringSource didn’t contact any other potential buyers, and in fact, the five-year-old startup only weighed VMware’s bid against the possibility of going public in 2011. (Subscribers to the 451 M&A KnowledgeBase can click here to view our estimates on SpringSource’s revenue, both trailing and projected, as well as its valuation.)

However, the source added that getting to an IPO would have likely required another round of funding for SpringSource. The dilution that would come with another round, combined with the deep uncertainty about the direction of the equity markets, tipped SpringSource toward the trade sale. In the end, that decision – and how Maritz executes on his step into application virtualization – will go a long way toward shaping his legacy at VMware.

EMC and advisors: All or nothing

Brenon Daly

Contact: Brenon Daly

After EMC doled out no fewer than nine credits to different banks for working on its acquisition of Data Domain, we were curious how the deal credits would flow around the largest-ever purchase by EMC subsidiary VMware. (The unusually long list of advisers for EMC on Data Domain made us think – of all things – about the quip about compensation under some communist regimes: People pretended to work and the government pretended to pay them.) As it turns out, EMC/VMware swung to the other extreme, with not a single bank working for the virtualization giant in its purchase of SpringSource.

That’s not unusual, since VMware hadn’t really used bankers in the dozen or so acquisitions that it had inked before SpringSource. But those deals were mostly small. In fact, the cumulative spending for all of its earlier buys totals only about half of the $420m in cash and stock that VMware is set to hand over for SpringSource. By our tally, VMware’s pending purchase is the third-largest pickup of a VC-backed tech firm so far this year. Not that the print will show up for any bank. SpringSource didn’t use an adviser, either.

A first for Google: reaching for a public company

Brenon Daly

Contact: Brenon Daly

In the five years since Google went public, the serial shopper has picked up some 40 other companies. It has bought its way into security, collaboration software, mapping, video and voice, among other areas. And it has inked deals ranging from the low seven figures all the way up to $3.1bn for DoubleClick. But in all of its shopping, Google had never reached for a fellow public company. That changed Wednesday with the search giant’s announced $106m purchase of Amex-listed On2 Technologies. The transaction is expected to close by the end of the year.

Fittingly for a vendor that hangs ‘beta’ tags on products for years, Google didn’t immediately indicate its plans for On2. But we suspect that the video compression technology that On2 developed could well come in handy to lower bandwidth costs and sharpen up the performance of Google’s YouTube property, for instance. (Whatever the strategy, we’re pretty confident that the deal was a pure technology acquisition. Google certainly didn’t snag On2 for its financial performance. Money-burning On2, which has rung up an impressive $183m in accumulated deficit since its founding in 1992, has had negative working capital so far this year.)

As an aside, we would note that there are actually a few ties between Google’s YouTube buy and its pending pickup of On2. Both transactions are the only ones we’re aware of where Google used its own equity to cover the purchase price. (For those On2 shareholders who might be curious, Google shares have handily outperformed the market since the vendor handed over $1.65bn worth of stock to YouTube owners. Google shares are up about 12% since the company announced the YouTube deal in October 2006, compared to a 12% decline in the Nasdaq over that period.) Also, even though Google rarely uses a sell-side adviser, Credit Suisse Securities banked the search giant in both deals. In fact, we understand that the same banker, Credit Suisse’s Storm Duncan, handled the two acquisitions. Duncan worked across the table from Covington Associates’ Tom Cibotti, who advised On2.

SaaS deals echo in security industry

Brenon Daly

Contact: Brenon Daly

There are more than a few echoes of Symantec’s purchase of MessageLabs last October in McAfee’s reach last week for MX Logic. In terms of strategy, both acquisitions added millions of end users of on-demand security to the two largest security software companies, which have been slowly looking to increase that side of their business. MessageLabs had attracted more than eight million users at 19,000 customers, while MX Logic brings more than four million users at 30,000 customers.

As far as deal terms go, both buys were done at a similar valuation. Symantec paid 4.8 times trailing sales for MessageLabs, while we estimate McAfee is paying closer to 4 times trailing sales for MX Logic. (If we include the potential $30m earnout in the price, the multiple hits 4.9 times MX Logic’s trailing revenue.) And, we would add that both deals stand as the largest security transactions of their respective years, with the sales of these private software-as-a-service (SaaS) companies eclipsing the prices paid even for public vendors. Symantec shelled out $695m in cash for MessageLabs, topping McAfee’s $497m pickup of Secure Computing as the largest security deal in 2008. So far this year, McAfee’s $140m purchase of MX Logic is the industry’s biggest security transaction, slightly ahead of the contested take-private of Entrust for $124m.

We also suspect that both SaaS acquisitions will pay dividends for Symantec and McAfee. (We have heard from several sources that Symantec is particularly high on its reach across the Atlantic for MessageLabs.) Undoubtedly, these deals will deliver a higher return than the other large SaaS security acquisition, Google’s pickup of Postini. Done two years ago, that buy handed Postini a valuation that’s twice as rich as either MessageLabs or MX Logic. But unlike the moves by Symantec and McAfee, Google didn’t snag Postini for its security offering. Instead, the search giant had the ill-conceived notion that a startup could serve as the platform for its push of Google Apps. Not surprisingly, that idea hasn’t panned out. We certainly haven’t heard much about Postini in the two years since the search giant bought it.

IBM’s ‘Tuesday twofer’ still leaves it behind most years

Brenon Daly

Contact: Brenon Daly

In a highly unusual move, IBM did the M&A equivalent of a ‘Tuesday twofer,’ buying both big and small yesterday. In terms of the high-dollar deal, Big Blue said it will hand over nearly $1.17bn in cash for predictive analytics software vendor SPSS. The purchase of SPSS is the company’s largest transaction since it shelled out $5bn for Cognos in November 2007. In fact, we suspect the $1.17bn paid for SPSS is roughly the same amount that IBM spent on the nine deals it has announced (many of them with prices undisclosed) since picking up Cognos.

On the smaller side, IBM also said yesterday that it has acquired startup Ounce Labs, which makes source code analysis software. Terms weren’t revealed, but we wouldn’t be surprised to learn that the amount IBM paid for Ounce Labs was just 1% of the price it forked over for SPSS. Ounce Labs had raised some $29.5m in venture backing.

As a final thought on Big Blue’s doubleheader yesterday, we would note that the two purchases double the number of acquisitions that IBM has announced so far this year. The total of four deals in 2009, however, is basically half the number it had announced by this time in any of the previous three years.

Quiet close to Micro Focus-Borland after noisy process

Brenon Daly

Contact: Brenon Daly

After more than two months of back-and-forth negotiations, Micro Focus is set to take home Borland Software. Shareholders in Borland approved the $113m deal on Wednesday and Micro Focus shareholders signed off on it on Friday. Originally announced on May 6, the acquisition is set to close early next week. Along the way, Micro Focus had to pay 50% more than it originally bid, but still picks up the application lifecycle management vendor for just 1 times its sales.

The reason Micro Focus had to reach deeper into its coffers is that after the parties initially agreed to the transaction, at least two other shoppers popped up with offers of their own. Or more accurately, the would-be buyers indicated that they were interested in bidding. We already noted our suspicion that one of the pair was the recently launched 2SV Capital, although the firm didn’t pursue the nonbinding bid beyond an initial query.

As for the identity of the other suitor, which was identified only as Company A in US Securities and Exchange Commission filings, it turns out we were off with our guess of Embarcadero Technologies. In fact, we were off by about 3,000 miles. A source indicated that the mystery bidder was in fact Allen Systems Group, which has its headquarters in Naples, Florida. The privately held company has done some 30 acquisitions over the two decades it has been in business. We understand that the firm may have had trouble lining up the financing to top Micro Focus’ offer for Borland, which has an enterprise value of $164m. Allen Systems didn’t return several messages seeking comment.

A happy anniversary for Brocade-Foundry

Brenon Daly

Contact: Brenon Daly

As far as Wall Street is concerned, nothing has really happened to Brocade Communications over the past year. Shares in the storage and networking vendor trade exactly where they did this time last July. And yet, there have been monumental changes at the company during that time. Exactly a year ago today, Brocade announced its largest and riskiest deal: the $3bn purchase of Foundry Networks. The transaction faced a number of challenges, both in terms of strategy and execution. And compounding those difficulties was the fact that Brocade would be closing the acquisition during the most severe economic slowdown since the Great Depression.

For starters, Brocade was planning to borrow some $1.4bn of the $3bn purchase price. In normal times, that wouldn’t be a problem for a cash-producer like Brocade. But with the credit markets frozen last fall and people wondering about the economic outlook, borrowing seemed unlikely. (The uncertainty around the economy led the two sides to trim the final purchase price to just $2.6bn in late October; the transaction closed in mid-December.) Beyond the question of financing the pickup, folks questioned the wisdom of a deal that would move the combined company even more directly into competition with Cisco Systems, the most successful networking vendor of the modern era.

That thought certainly spooked investors. As soon as the pairing was announced, Wall Street knocked some 20% off Brocade shares and continued to put pressure on them well into this year. At their lows in early March, Brocade shares had lost some three-quarters of their value since the announcement of the acquisition. (That compares to a 40% decline in the Nasdaq during the same period.) The slide left Brocade in the absurd situation of sporting a market capitalization of just over $800m, despite tracking to generate about $1.9bn in sales in the current fiscal year. It was also a rather damning assessment of the Foundry buy, given that Wall Street was valuing the combined Brocade-Foundry entity at just one-third the amount that Brocade had valued Foundry.

It turns out that the market dramatically undervalued Brocade. Since bottoming out, its shares have quadrupled, giving the vendor a current market capitalization of $3.4bn. That run has left Brocade shares flat over the past year, while the Nasdaq is down some 18% during that time. Brocade has also slightly outperformed rival Cisco over the past year.

Wall Street seems to be digesting the fact that Brocade may actually be able to survive – even thrive – in its fight with Cisco. (For its part, Cisco hasn’t been helping its own cause. Recent actions, including introducing a new server offering, have created more enemies than friends.) Meanwhile, Brocade has integrated Foundry a quarter or two earlier than planned and has been pitching itself as a viable alternative to the giant. Despite a tough beginning, that message is starting to resonate with customers.

Is Riverbed the next Data Domain?

Brenon Daly

Contact: Brenon Daly

With Data Domain off the market, we did a bit of blue-sky thinking about which company might find itself snapped up in a similar scenario. Our pick? Riverbed Technology. We’re not suggesting that the vendor is in play by any means, but hear us out on this one.

For starters, both Data Domain and Riverbed are fast-growing, single-product companies in markets that are dominated by mature technology vendors that have deep pockets and are hungry for growth. In the case of Data Domain it’s the storage market, while for Riverbed it’s the networking market. (To put some numbers around the differences, consider that Data Domain more than doubled its revenue in 2008, while its acquirer, EMC, saw storage revenue inch up just 10% last year.)

The obvious buyer of Riverbed would be Cisco. That’s so obvious, in fact, that we heard Cisco made at least two overtures to Riverbed before the company went public in September 2006. (However, one source characterized Cisco’s interest more as ‘industrial espionage’ than acquisition negotiations.) So we don’t see Riverbed going to Cisco. Instead, we like Hewlett-Packard as the acquirer of Riverbed.

The two companies have been friendly for years. HP originally had an OEM deal with Riverbed, and later resold the Riverbed product. HP has also integrated the Riverbed Optimization Software into its ProCurve infrastructure. To be clear, we’re not suggesting that there’s anything more than technology talks between the two sides right now. But if HP wanted to bolster ProCurve, picking up Riverbed would do that. Plus, such a deal could help HP stick it to Cisco, which took a swipe at HP earlier this year by jumping into the server market. Maybe HP is interested in countering with a big buy into one of the fastest-growing segments of the networking market.

A new bid for Borland?

Brenon Daly

Contact: Brenon Daly

Nearly a month after Micro Focus and Borland announced their planned combination, a pair of after-the-fact bidders pushed Micro Focus to reach a little deeper into its pockets for the application lifecycle management vendor. Now we’re hearing that one of the mystery suitors may well come back with a higher offer. As it stands, Borland shareholders are set to vote on Micro Focus’ bid of $1.15 in cash for each Borland share, or a total of some $92m, on July 22.

However, several sources have indicated that one unidentified party that previously floated a range of $1.10-1.20 per Borland share may well be preparing a bid that would top the existing offer from Micro Focus. The identity of that suitor has never been revealed, and is referred to as ‘Company A’ in the proxy filings. (We suspect, but have not confirmed, that Company A could be Embarcadero Technologies, which went private two years ago in a $200m buyout by Thoma Cressey Bravo. Following a split, TCB now goes by the name Thoma Bravo.) The proxy adds that Company A originally approached Borland with an unsolicited offer in June 2008, and has been more or less present during the process since then. Borland has dismissed several rounds of interest by Company A because of questions about its ability to pay for the deal.

While Company A may or may not come back with a higher offer, the other suitor that emerged after Micro Focus and Borland agreed to their deal – an unnamed private equity firm referred to as ‘Company E’ – will not be dusting off its bid, according to the proxy. Company E has never been identified, but we have a pretty strong suspicion that it could be a recently launched investment firm in the Boston area called 2SV Capital. Calls to the firm weren’t returned.

Certainly, a number of signs point to 2SV Capital as one of Borland’s mystery bidders. Two of the three partners in the firm certainly know the Borland business well, having worked together on the sale of Segue Software in early 2006 to Borland. (As we noted in a recent report on the pending sale of Borland, the Segue business is essentially the main reason why Micro Focus is interested in Borland.) 2SV Capital founder Richard Vieira, who was then working for Jefferies & Co, advised Segue, which was at the time headed up by Joe Krivickas, on the sale to Borland. (Krivickas recently joined Vieira at 2SV Capital.) If indeed 2SV Capital were interested, we suspect the buyout shop wouldn’t have needed to spend too much time on due diligence, given their understanding of the business.