Category: infrastructure software

Quest shops again, virtually

Brenon Daly

Contact: Simon Robinson, Brenon Daly

A year after closing a deal with Vizioncore that got Quest Software into the storage virtualization market, the company went shopping again this week. The systems management company picked up some of the assets of venture-backed MonoSphere, most notably its Storage Horizon product. This is a storage analysis and reporting tool designed to help storage managers assess the capacity optimization of their existing multivendor arrays so they can reclaim unused capacity and project future requirements more accurately. Storage Horizon will slot into Quest’s portfolio for managing storage in virtualized server environments, which is currently sold under the vOptimizer Pro brand.

As part of Quest, MonoSphere may well have the opportunity to deliver on the promise of its technology. (It was that potential that attracted some $41m in backing from Intel Capital, ComVentures and Lightspeed Venture Partners.) On its own, MonoSphere didn’t have much to show for itself. That’s a familiar story concerning other storage-reporting specialists, which often find that large enterprises are hesitant to buy such tools from small vendors, especially when their existing suppliers are happy to offer similar functionality for little or no cost. But with Quest, which counts more than 100,000 customers and expects to report some $730m in 2008 revenue, MonoSphere may be able to land customers that had previously slipped through its hands.

Dell’s deals

Brenon Daly

Contact: Brenon Daly

Dell picked up one services company last week, even as rumors were swirling that the company might be eyeing another, larger services deal. Dell said Friday that it would hand over $12m in stock to acquire four divisions from Allin Corp, an IT consulting shop that trades on the Nasdaq’s bulletin board. Allin, which is profitable, reported revenue of some $22m for the first three months of 2008.

The asset buy from Allin was Dell’s first acquisition in almost a year, following last February’s $155m purchase of MessageOne. However, rather than the Allin deal, the talk last week about Dell’s M&A was more focused on reports of whether the company is planning a play for storage-consulting firm GlassHouse Technologies. That company filed an S1 a little more than a year ago, but has only amended it once since then. GlassHouse was looking to raise $100m in the offering, which was slated to be led by Goldman Sachs.

While Dell has been active in building out its services portfolio through acquisitions (notably, Everdream and SilverBack Technologies in 2007), we would note that the company might face some difficulties in preserving impartiality at an independent GlassHouse if it were to pick up the storage consultant. The reason? Dell might be interested in pushing its own EqualLogic gear, which it bought in November 2007 for $1.4bn (which stands as the company’s largest-ever deal). Speaking of EqualLogic, there are a number of common threads that tie it to GlassHouse. Both companies are based in the Northeast, have nearly 30% of their equity owned by venture firm Sigma Partners and tapped Goldman to lead their offerings.

Recent Dell acquisitions

Date Company Deal value
January 2009 Allin Corp (assets) $12m
February 2008 MessageOne $155m
December 2007 The Networked Storage Company $31m
November 2007 Everdream Not disclosed
November 2007 EqualLogic $1.4bn

Source: The 451 M&A KnowledgeBase

Hey, big spender?

Brenon Daly

Contact: Brenon Daly

Given all the economic uncertainty, companies have made it clear that they’re not in the market for any big deals. (In our annual survey of corporate development officials, they indicated that they were least likely to pursue ‘transformative’ deals in 2009.) To put some numbers around that sentiment, we contrasted the shopping tab of four well-known tech companies in 2008 with the previous year’s tally.

The quartet we selected (IBM, SAP, Microsoft and Nokia) all announced the largest deals in their respective histories in 2007 so we naturally expected some drop-off in spending. But we were amazed at the steepness of the plunge. In 2007, the four companies announced 40 transactions with an aggregate value of $29.2bn. Last year, that dropped to 34 deals worth a paltry $4.7bn. (In fact, each of the firms inked a single transaction in 2007 that was worth more than 2008’s collective total.) And it’s not like they don’t have the resources to continue shopping. Over the past four quarters, IBM, SAP, Microsoft and Nokia have collectively generated an astounding $45bn in cash-flow operations.

And the Golden Tombstone goes to …

Brenon Daly

Contact: Brenon Daly

In addition to getting insight into what corporate development officials plan to buy in the coming year, our annual survey also asked which company they thought made the smartest acquisition during the previous year. (See our full report on the survey.) So which company gets the coveted Golden Tombstone for 2008? Hewlett-Packard, for its $13.9bn purchase of EDS in May.

However, in handing out this peer-voted accolade, we hope that HP doesn’t stumble after stepping up to the dais to accept it, as happened to last year’s winner. (Maybe this is a variation of the ‘Sports Illustrated cover jinx,’ which is a surprisingly accurate predictor of which team is about to hit an inexplicable – and intractable – slump.) Our 2007 Golden Tombstone went to Citrix for its $500m pickup of XenSource.

Although Citrix had promised big things for the virtualization startup, it is coming up short. When the ink had just dried on the acquisition, Citrix talked about $50m (or even higher, privately) of 2008 revenue from the startup, which had no sales to speak of when it sold. Now, it looks like XenDesktop and XenServer will actually contribute about $25m for the year. Granted, the startup XenSource and the 46-year-old EDS are at opposite ends of the corporate lifecycle, and the strategies that drove the deals are completely different. Still, we’re a superstitious bunch, particularly when we’ve already had so much bad luck on the market.

CA back in M&A

Brenon Daly

Contact: Brenon Daly

It turns out that there is some shopping going on out on Long Island, after all. Back in September, we noted that CA Inc had been out of the market for two years and that some bankers weren’t ‘bothering with the trip’ out to the company’s headquarters. (On a recent call with CA’s corporate development team, which has added four members since the start of the year, one participant good-naturedly tweaked us that he had to end our call to catch a meeting a meeting with a banker.)

Since our original piece, the company has done a lot more than just meet with bankers or ‘book read.’ It has closed three deals and has others in ‘various stages.’ (One note about the M&A pause: CA skipped a period of high-priced deals, and will undoubtedly find that it will get more bang for its buck in the current environment and into next year. In our recent survey of corporate development officials, nine out of 10 said private company valuations are going to come down in 2009.)

The return to shopping is part of CA’s announced intent to add 1-2% of revenue through acquisitions over the year. (On a current $4.1bn revenue base, that works out to $40-$80m of sales at acquired companies.) CA will likely be talking about that – along with other financial matters – during its annual meeting with Wall Street analysts on Friday.

CA’s return to the market

Date Target Target sector
November 13, 2008 Eurekify Identity & access management
October 15, 2008 Optinuity Infrastructure management
October 7, 2008 IDFocus Identity & access management

Source: The 451 M&A KnowledgeBase

Telco equipment troubles

Brenon Daly

Contact: Brenon Daly

For communications infrastructure equipment vendors, it seems that the only thing worse than doing a major acquisition is not doing a major acquisition. At least that’s the only conclusion we can draw from the relative performance of Alcatel-Lucent and Nortel Networks in recent years. Shareholder returns since the Franco-American combination was announced on April 2, 2006: Alcatel-Lucent ‘only’ down 85%, compared to Nortel’s drop of 99%.

Both companies have been in the news recently as they look for ways out of their protracted slumps. For Alcatel-Lucent, the future appears to be in Web 2.0, whatever that means. (That’s a bit of an oversimplification. To read what the company actually plans, view my colleague Gilad Nass’ report on the company’s restructuring.)

Meanwhile, the outlook at Nortel has gotten so bad that some reports last week indicated that the company may be forced into bankruptcy in the near future. Nortel quickly dismissed this, pointing out that it still has a cash cushion and doesn’t have any debt coming due until 2011. Nonetheless, Nortel shares are changing hands at their lowest-ever level (closing at 33 cents each on Monday) and may get booted off the Big Board because the stock price doesn’t meet the NYSE’s minimums for listing. Nortel’s current market capitalization is just $164m, but because of all the debt it carries, its enterprise value is $2.5bn.

We honestly can’t envision another strategic acquirer stepping in to buy Nortel, even at its current bargain-basement price. And forget about a buyout shop making a run at the company, given the frozen credit market and Nortel’s cash burn. But what about a piecemeal sale of the vendor, continuing its already announced divestiture plan?

Well, we suspect Microsoft would be interested in some of Nortel’s unified communications (UC) technology. There have been rumors of a deal between the two companies ever since they announced their UC partnership, dubbed Innovative Communications Alliance, in July 2006. (That was back when Nortel shares were changing hands at about $20 each, giving it a market capitalization of roughly $10bn.) Despite that rumor, we don’t see Microsoft getting into the business of selling base stations and routers, which would come with all of Nortel. If indeed Nortel goes bankrupt, however, Microsoft might be able to snag the UC assets in a court-supervised auction.

NetApp: Barenaked savings

Brenon Daly

Contact: Brenon Daly

What do the Barenaked Ladies and SnapMirror for Open Systems have in common? Well, both have been canceled recently by NetApp in a bid to save money as growth rates at the storage giant continue to head south. The company is currently more than halfway through its fiscal year, which wraps at the end of April, and its projected growth rate of 9% is shaping up to be just half the level it was last year (18%), which was half the level it was the year before that (36%). And given the economic environment, estimates may well decline again between now and when it actually reports results.

Like many companies facing the current recession, NetApp’s answer has been to cut costs. In October, it scratched plans for its user conference, NetApp Accelerate (the Barenaked Ladies had been booked to play one night at the event, which was slated for February). And then last week, NetApp said in an SEC filing that it was shuttering the SnapMirror for Open Systems product line. It will take a charge of as much as $20m (roughly two-thirds of that as a straight write-down and one-third for possible payments for facilities closures and severance agreements).

SnapMirror came with NetApp’s pricey acquisition of Topio in November 2006. The company paid $160m for Topio, which we understand was generating less than $10m in sales. The curtain will fall on SnapMirror before the end of NetApp’s fiscal year, which should help its cost structure for the year. NetApp could certainly use a boost in this area. The company runs at just a 10% operating margin, and has seen the increase in operating expenses outstrip the increase in sales during the first two quarters of its current fiscal year.

Select NetApp acquisitions

Date Target Deal value Rationale
January 2008 Onaro $105m SAN management software
November 2006 Topio $160m Disaster-recovery software
June 2005 Decru $272m Storage security
November 2003 Spinnaker Networks $300m High-end storage

Source: The 451 M&A KnowledgeBase

GRC=Get Ready for Consolidation

Brenon Daly

Contact: Brenon Daly

After a pretty thin stretch of deals in the governance, risk and compliance (GRC) market, Thomson Reuters reached for startup Paisley Consulting last week. The deal comes after the two companies partnered for a year, but not in the conventional manner. Rather than the big company reselling the startup’s wares, Paisley actually resold Thomson’s tax and auditing product, Checkpoint. The two companies also had a fair number of joint customers.

We understand that Paisley wasn’t really looking for a deal. Founded in 1995, Paisley is still run – and was majority owned – by its founding husband-and-wife team of Tim and Stacey (née Paisley) Welu. (The pair will continue to run the business after the acquisition.) The Minneapolis–based company took only one round of outside money, a $10m slug in 2003 from Insight Venture Partners. Despite its beginnings, Paisley was no mom-and-pop shop. We understand the company is set to finish 2008 with sales of more than $40m.

The Thomson-Paisley pairing comes after several large software companies, which would be the most conventional buyers of GRC startups, inked deals of their own. Oracle stayed close to home, and grabbed existing GRC partner LogicalApps last year, while SAP made a big play for Virsa Systems in mid-2006. (As a side note on SAP’s move, we would mention that longtime Oracle executive Ray Lane sat on Virsa’s board and helped broker the initial partnership that led to the purchase.)

With Paisley gone, there are still a few high-profile GRC vendors in the market. BWise, which has its roots in the Netherlands, has a strong presence in Europe; OpenPages, which started life as a content management vendor before focusing on GRC; and a company that’s not unlike Paisley, Archer Technologies, which my colleague Paul Roberts recently profiled. We understand that both BWise and Archer, which is about half the size of Paisley, have been talking with potential suitors throughout the year. However, a month ago, Archer sold a 40% stake of the company to Bain Capital Ventures, which likely takes it off the block for now.

Dealing with a legacy

Brenon Daly

Justly or not, acquisitions go a long way toward shaping a CEO’s legacy. (If you don’t believe us, just ask Jerry Levin, who sold Time Inc for what turned out to be a pile of wampum, in the form of overinflated AOL equity.) With Monday’s announcements that two major tech CEOs are on their way out, we pause to look at how deals – or lack of deals – will shape their respective legacies.

Let’s start with Symantec’s John Thompson, who will leave the storage and security giant by the end of its current fiscal year next April. Under his nearly decade-long leadership, Symantec shares rose some 500%, compared to a flat performance over the same period in shares of rival McAfee and a 40% decline in the Nasdaq. However, the one blemish on his record is Symantec’s largest-ever deal, its $13.5bn purchase of Veritas. (Thompson guided Symantec through more than 40 other acquisitions during his tenure.) Symantec shares peaked at about the time the company announced the deal, and have given back most of the gains they had piled up since mid-2003.

And then there’s Yahoo’s once-and-future king, Jerry Yang. We’re guessing history will be less kind to the man who turned down Microsoft’s offer of at least $31 for each share of Yahoo. Shares of the foundering search giant briefly dipped into the single digits earlier this month. However, they jumped almost 10% on Tuesday as Wall Street applauded the imminent departure of Yang, who has overseen the incineration of some $20bn of shareholder value since he reassumed the top spot at Yahoo in June 2007.

Aside from the ‘relief rally’ for Yang’s move, Yahoo shares also got a boost from speculation that the turnover in the corner office makes a deal with Microsoft more likely. We have our doubts about that. Instead, we’d focus on what the CEO change at Symantec means for deal activity. Our bet: Incoming CEO Enrique Salem will unwind several large chunks of the Veritas business, perhaps starting with NetBackup. As recently as last summer, Thompson said ‘nothing’ from the under-performing Veritas portfolio was for sale. Salem will set the company’s line on that in the future, and we wouldn’t be surprised to see NetBackup or other storage assets find their way onto the block.

A Freudian deal?

Brenon Daly

We’ve run a lot of different analyses on transactions, but AccessData’s proposed acquisition of Guidance Software is the first one we’ve ever subjected to Freudian analysis. What do we mean? Well, almost all of the executives at AccessData, a private data forensics software vendor, used to work at publicly traded Guidance. (AccessData’s CEO, COO and two VPs are former employees of the company they are now bidding on.)

After its initial bid a month ago was rebuffed, AccessData took public on Tuesday its offer of $4.50 for each share of Guidance. With about 23 million shares outstanding, the proposed transaction values Guidance at about $105m. However, debt-free Guidance holds $28m in cash, lowering the enterprise value of the bid to about $77m. Guidance is expected to record about $90m in sales this year. In comparison, AccessData is about one-third that size, primarily because it doesn’t have any services revenue.

We understand AccessData, which has never taken outside funding, plans to finance the deal internally, if it goes through. Guidance has rejected the bid. And, although AccessData has threatened to take its unsolicited proposal directly to shareholders, a tender offer is unlikely to go through unless it gets the blessing of one Guidance executive: Chairman and CTO Shawn McCreight, who founded the company and owns some 44% of its stock. If nothing else, AccessData’s bid will make Guidance’s third-quarter conference call on Thursday more interesting.