Category: IT Outsourcing

Epiq’s expensive e-discovery deal

Brenon Daly

Contact: Brenon Daly

Announcing the largest e-discovery deal in some three-and-a-half years, Epiq Systems said earlier this week that it will borrow $100m to acquire Encore Discovery Solutions, a service provider for law firms. (My colleague Nick Patience has the full details on the acquisition.) The rationale is fairly straightforward: Epiq wanted to shore up its presence in the western US, so it reached for Phoenix-based Encore. That sort of geographic consolidation happens all the time – but it rarely happens at the kind of valuation that Epiq is paying in its services play.

Encore had generated some $40m in revenue, according to Epiq, meaning it’s trading at 2.5 times sales. That’s a fairly high multiple for a services shop, which typically have lumpy – and concentrated – revenue. (That goes double for a market like e-discovery that is largely driven by unpredictable events like lawsuits.) Unlike Epiq, Encore didn’t have its own e-discovery software, instead licensing it from other vendors. Clearly, however, the lack of IP didn’t hurt Encore’s price.

More representative of the e-discovery market is probably Unify Corp’s purchase last summer of Daegis. Unify paid $37.5m, or 1.6x sales, for Daegis, which generates about half of its sales from tools and the other half from associated services. But from Epiq’s view, the purchase of Encore sets up a relatively low threshold for a return (it is borrowing at around 3.5%) and adds bulk to a business that has a fair amount of momentum. Epiq said recently that its e-discovery business has posted five straight quarters of growth, finishing 2010 with sales at the unit up 45% to a record $81m.

eBay bids high for GSI

Ben Kolada

Contact: Ben Kolada

In its largest deal in the past half-decade, eBay is set to acquire e-commerce vendor GSI Commerce for $2.4bn. The company hasn’t made such a move since September 2005, when it forked over $2.6bn for VoIP provider Skype. And while hindsight shows that eBay certainly overpaid for that property, on an equity value basis, this transaction actually carries the highest bid eBay has offered. (We would also note that this pending acquisition is the largest Internet deal since February 2008.)

Although the deal represents a fairly standard price-to-sales valuation, it carries a hefty share price premium that makes the 40-day go-shopping clause more of a formality than anything else. The $29.25-per-share cash offer values GSI at 1.6 times its trailing sales, in line with other public takeovers, but it represents a premium of 51% over GSI’s closing share price on Friday and the highest price its shares have seen since July 2010. That’s more than twice the premiums eBay offered for Gmarket in April 2009 and Shopping.com in June 2005. The valuation is actually slightly higher when considering that eBay isn’t interested in the entire company. As per terms of the deal, which is expected to close in the third quarter, eBay will divest GSI’s licensed sports merchandise business and 70% of its ShopRunner and Rue La La assets to a newly formed company led by GSI founder and CEO Michael Rubin.

Tangoe lines up for IPO dance

Brenon Daly

Contact: Brenon Daly

Back in January 2009, Tangoe made a small acquisition on its way to what we expected would be an IPO. Of course, neither the telecom expense management (TEM) vendor nor any other company was going to make it public in the first few months of last year. But with the recovery in the capital markets, Tangoe has indeed filed for its IPO, looking to raise $75m. The 10-year-old company plans to trade under the ticker ‘TNGO’ on the Nasdaq. We expect a fairly strong offering from Tangoe, which nearly doubled sales to $37.5m in 2008, and pushed that up another 49% to $56m last year despite the recession. See our full report on the company and the planned IPO.

Tangoe focuses on lifecycle management for fixed and mobile communications and more recently mobile device management. As a TEM provider, Tangoe has more than 350 companies using its expense management tools and services. The Orange, Connecticut-based vendor has pushed into the mobile communications space with the purchases of Traq Wireless in March 2007 and InterNoded in January 2009. Traq provided wireless expense management, helping Tangoe expand its lifecycle management for mobile as customers moved more of their communications off fixed lines. Offering deeper management and monitoring of these mobile devices, InterNoded gave Tangoe the ability to provision, secure and remotely wipe devices used by its customers.

PE: which door is marked ‘exit’?

Brenon Daly

by Brenon Daly, Jason Schafer

After chalking up some 17 purchases under the ownership of a private equity (PE) consortium, ViaWest has been bought by another PE firm. Oak Hill Capital Partners will pick up the 11-year-old managed hosting provider, which currently operates 16 datacenters and counts 1,000 customers. Although financial details of the transaction were not disclosed, we estimate the purchase price at around $420m. That works out to about 4.2 times trailing revenue and about 10 times cash flow for ViaWest, according to our understanding. (My colleagues at Tier1 Research estimate that roughly 70% of ViaWest’s revenue comes from its colocation business, with the remaining 30% coming from managed services.)

The deal, which should be completed this quarter, caught our eye because it is yet another recent sponsor-to-sponsor transaction that we estimate is valued in the hundreds of millions of dollars. Almost exactly two months ago, Francisco Partners flipped RedPrairie to New Mountain Capital for what we understand was roughly the same price as ViaWest. The sale of the supply chain management vendor came even though it had filed a few months before that to go public.

While there’s certainly nothing wrong with buyout shops swapping assets, it’s hardly the sign of a healthy exit environment for PE firms. Of course, there is one gigantic counterpoint to that: NXP Semiconductors, owned by Bain Capital and KKR, filed last week to sell $1.15bn worth of shares on the NYSE. The buyout tandem picked up the chip maker in 2006, when it was spun off of Royal Philips Electronics. We’re certain that a lot of fellow financial buyers, which also took home chip companies during the LBO boom in 2006-07, will be following NXP’s offering very closely.

Intuit-PayCycle: A kind of homecoming

Brenon Daly

by Brenon Daly

Looking at Intuit’s acquisition of PayCycle Inc, we might note that the alumni network can pay off – and pay off big. Intuit picked up the payroll services startup earlier this week for $170m in cash. We understand that PayCycle generated only about $30m over the previous four quarters, meaning Intuit paid an estimated 5.7x sales. (Granted, by looking solely at revenue, we’re arguably shortchanging PayCycle. The company, which has some 85,000 customers, sells its payroll services on a subscription basis, meaning revenue substantially lags actual contracts it has billed.) In a somewhat unusual mandate, Goldman Sachs advised Intuit, while Lane, Berry & Co., now owned by Raymond James & Associates, advised PayCycle.

There are a number of connections between Intuit and PayCycle. The Palo Alto, California-based startup was founded by a pair of former Intuit executives (Martin Gates and Rene Lacerte) who then turned the company over to Jim Heeger, Intuit’s former chief financial officer. Also, board member David Hornik of August Capital formerly drew a paycheck from Intuit, as did fellow investor Tom Blaisdell of DCM.

Preemptive consolidation in financial IT?

-Contact Thomas Rasmussen

With reports indicating that IBM has pulled its multibillion-dollar offer for Sun Microsystems, the second-largest deal of the year so far is the $2.9bn all-equity purchase of Metavante by Fidelity National Information Services (FIS) announced in early April. (Yesterday, Express Scripts announced that it will fork over $4.7bn for WellPoint’s NextRx subsidiaries.) In fact, we recently noted that the first quarter closed without a single transaction worth more than $1bn. It was the first time a quarter passed without a 10-digit deal since we began keeping records in January 2002. This transaction consolidates two active acquirers. Metavante and FIS have together inked more than 30 purchases over the past five years: FIS has completed 18 deals worth north of $7bn (excluding this pickup), while Metavante has closed 15 to the tune of about $1.4bn.

The combined FIS and Metavante will have revenue of $5.1bn, about $300m in cash after the transaction closes, and free cash flow of about $700m. However, though the management of the new company outlined its healthy cash flow as means for making further acquisitions, we don’t expect them to step immediately back into the market as the giants work on integrating the blockbuster deal. (We would note that both FIS and Metavante were out of the market in 2008.) Instead, we expect near-term consolidation to likely come from the firm’s two remaining large competitors Fiserv and First Data Corp, which Kohlberg Kravis Roberts took private for $30bn two years ago. Additionally, we could see Oracle and IBM using their vast cash reserves to buy their way into this sector. In fact, FIS and Metavante said in their conference call discussing their planned transaction that one of the reasons they were getting together was to stave off the expected competition from Oracle and Big Blue. So who might be of interest to any of these buyers? We suspect smaller players such as Jack Henry & Associates or even payments competitors TeleCommunication Systems and S1 Corp could well become targets.

Financial IT M&A by the now three largest buyers since 2002

Acquirer Number of deals Total deal value
FIS-Metavante 42 $12.7bn
First Data Corp 20 $9bn
Fiserv 28 $5.3bn

Source: The 451 M&A KnowledgeBase