Category: LBO

A quiet end to the year

Brenon Daly

Contact: Brenon Daly

As we flip the calendar to the final month of 2009, it’s worth noting that December is almost always a quiet month for M&A. That was particularly true last December, which saw just $6bn of spending on tech acquisitions. The spending level represented a scant 2% of the total $301bn of spending on deals in 2008. (If the month had recorded its representative one-twelfth (8%) of the annual total, spending would have come in at roughly $25bn.)

Of course, last December was a pretty bleak time, with investment banks reeling and companies ratcheting back their financial projections for the coming quarters. But even in times of more robust dealmaking, December has been a below-average contributor to annual M&A spending. For instance, deals in the final month of 2007 and 2006 represented just 6% of the totals in both years.

So what does all that mean for M&A in the final month of this year? Assuming we return to a more normalized level of activity in which December accounts for about 6% of total annual spending, we’ll be looking at about $9bn worth of deals between now and year-end. Overall, that would put total spending for 2009 at just $151bn – exactly half the amount that we saw in 2008.

A month off

Year Total spending in December December spending as % of annual total
2008 $6bn 2%
2007 $26bn 6%
2006 $29bn 6%
2005 $38bn 10%

Source: The 451 M&A KnowledgeBase

Corel: ‘What a turkey’

Brenon Daly

Contact: Brenon Daly

As many of us get ready to sit down with friends and family for our annual Thanksgiving dinner on Thursday, our thoughts inescapably turn to poultry. When we look around at some of the deals out there right now, our thoughts also turn to poultry. For instance, whenever Corel comes up, we can’t help but think to ourselves, ‘What a turkey.’

By ‘turkey,’ we don’t just mean that Corel has been a second-rate software company and an even worse investment. (Although both are certainly true. Corel shares have never traded above the price at which they were spun off in mid-2006, and currently change hands at just one-quarter of that level.) But we also mean that since the grab-bag software vendor went private in mid-2003 with Vector Capital, Corel equity has been carved up like a Thanksgiving turkey. And now there’s a fight brewing over one of the drumsticks.

As we’ve chronicled in the past, Vector has been angling to repurchase the chunk of Corel that it spun to the public three-and-a-half years ago. Vector recently offered to repurchase the one-third of Corel shares that it doesn’t own at $4 each. While that was a bit higher than it initially offered in late October, the bid is substantially below its offer of $11 per share back in March 2008.

Vector’s effort received a new urgency this week when Corel warned that it runs the risk of falling below certain covenants and defaulting on its loans unless the sale to Vector goes through. The deadline for being in line with the covenants is November 30. The buyout shop contends, among other things, that the costs of Corel being a public company get in the way of making the necessary investments to keep the 24-year-old firm competitive. Corel’s investors aren’t necessarily buying that, at least not at the price offered by Vector. Corel shares have traded above the $4 bid for the past two weeks.

A management ‘buy-under’ at Silicon Storage Technology?

Brenon Daly

Contact: Brenon Daly

In the third-quarter earnings report for Silicon Storage Technology at the end of October, chief executive Bing Yeh went out of his way to tout the vastly improving outlook for the flash memory vendor. Yeh noted that end-market demand had recovered and pricing had firmed up in what had been a pretty tough market. Third-quarter sales picked up sequentially and the company actually posted black numbers after three straight quarters of losses. The rebound was expected to continue in the fourth quarter, with a profit forecast for the period, as well.

And yet, the price that Yeh and his buyout partners at Prophet Equity bid for SST last week is actually lower than the vendor’s share price on the day Yeh made his comments about the rosy outlook for the company he heads. In fact, over the past two months, shares of SST have only traded below the proposed sale price of $2.10 in 11 of the 46 trading days. Looked at another way, the proposed management buyout (MBO) of SST represents a ‘take-under’ (rather than a takeover) when compared to the closing price in three out of four sessions since early September.

By their very nature, MBOs are fraught with conflict. In cases like SST, where executives plan to roll over their stakes in the company, the executives are effectively both buyers and sellers of the firm. (According to SST’s proxy, Yeh holds roughly 11% of all shares, making him the single-largest owner of the vendor.) The conflict emerges when we look at the basic economic self-interest on both sides of the transaction: The owners of SST (including Yeh) want to get as high a price as possible in the sale of their business, while the buyers (including Yeh) want to pay as low a price as possible to purchase the business.

Beyond the mismatch of motivation in MBOs, there’s also the thorny issue that executives almost certainly have insights on their business that aren’t available to other owners. We would guess that Yeh, who helped found SST 20 years ago and also serves as the chairman of the company’s board, probably knows more about the firm’s business and its prospects than anyone else on the planet.

At least one other insider at SST, however, didn’t share the support of the below-market MBO. Board member Bryant Riley, the founder of the Southern California investment firm B. Riley & Co., voted against the proposed buyout and then resigned from the board. (It’s worth noting that Riley got his seat in May 2008 only after agreeing to stop pestering the company about ‘strategic alternatives.’) Most SST investors – at least those who don’t stand to have a stake in the privately held company – have also voted against the deal. Shares have traded above the offer price since the bid was revealed November 12.

Is IAC looking to sell Ask.com?

-Contact Thomas Rasmussen

It looks like acquisitive IAC/InterActiveCorp could be gearing up to undo its largest buy ever, Ask.com. At least Barry Diller’s opening remarks during IAC’s conference call last week seem to indicate a desire to explore the possibility. The New York City-based Internet media company has successfully expanded into a content giant by snapping up dozens of Internet properties. IAC has inked 36 deals worth more than $4.5bn since 2002. Many of those purchases have been tiny (Airfarewatchdog.com, for instance), but IAC did make a significant pickup when it handed over $1.85bn for Ask.com in March 2005.

However, we suspect that Ask.com hasn’t delivered the kind of returns that IAC had hoped for, since the search engine remains far behind Yahoo, Microsoft and Google in terms of usage. Still, with roughly 4% of US search market share, Ask.com would be a significant addition to any acquirer in the competitive scale-driven space, where every percentage point counts.

Though we won’t rule out a financial buyout, which would have more than a few echoes of the just-closed Skype carve-out, we think a strategic buyer for Ask.com makes more sense. Two obvious suitors spring to mind: Google and Microsoft. Although Google recently made its intentions for more acquisitions known and even signaled a willingness to do large deals again, we do not think it is likely to pick up Ask.com. Rather than make a consolidation play, we expect Google to continue to snare startups to offer additional services to existing users, while also bolstering its recent moves into new markets such as online video and mobile communications.

On the other hand, Microsoft has displayed a willingness to spend a lot of money in its game of catch-up with Google. With an acquisition of Ask.com coupled with its impending Yahoo deal, Microsoft could come very close to capturing one-third of all search traffic. While that would undoubtedly help Microsoft, a divestiture of Ask.com could also benefit IAC. Granted, it would mean slicing its revenue roughly in half, but IAC would have a cleaner story to tell Wall Street. And it could use some help in that area. Investors give a paltry valuation to the cash-heavy company, valuing the business at less than one times sales on the basis of enterprise value. IAC sports a $2.6bn market capitalization, but holds $1.8bn in cash.

IAC’s historic acquisitions and divestitures, 2002 – present

Year Number of acquisitions Number of divestitures
2009 5 4
2008 7 0
2007 6 0
2006 3 0
2005 3 0
2004 4 0
2003 4 0
2002 4 0

Source: The 451 M&A KnowledgeBase

At long last, Kana gets gone

Brenon Daly

Contact: Brenon Daly

Exactly three years ago, we bluntly wrote that there was no reason for Kana Software to be a public company, at least in its current form. Kana’s performance in the intervening 1,000 days since we published that report did nothing to change our view. If anything, as the red ink continued to gush at Kana, we became even more convinced of the need for a sale of the customer support software vendor. The sale finally happened Tuesday, with Accel-KKR agreeing to pay $49m in cash for most of Kana.

We were hardly alone in our assessment that Kana – a money-burning, Bulletin Board-listed company that also had negative working capital – should be cleared off the exchange. As we noted earlier this summer, Kana’s largest shareholder also wanted something to change at the company. KVO Capital Management, which had owned some 8.5% of the company, was pushing earlier this summer to get a director on the Kana board. KVO, which declined to comment, has agreed to back the sale to the buyout group, according to the release.

A PE rebound?

Brenon Daly

Contact: Brenon Daly

After the turmoil in the credit market essentially knocked PE shops out of tech M&A for much of the past two years, we’re hearing various indications that buyouts may be coming back. We recently noted the rumor in the market that in the coming weeks PE firm Francisco Partners will ink in the paperwork for a public offering for one of its portfolio companies, RedPrairie. And bankers indicate financial buyers are once again looking to add to their portfolios, rather than just support their existing investments.

Meanwhile, on the other end of the PE lifecycle, there’s also some bullishness for buyout funds from limited partners, at least according to one source. Marlin Equity Partners is said to have recently raised a $450m third fund – and even had commitments for up to $600m. Los Angeles-based Marlin, which last raised a $300m fund two years ago, didn’t return a call.

Of course, we have to look at any rebound in the overall LBO market in context. Certainly, we have seen some notable purchases this year by Symphony Technology Group, Vista Equity Partners and Thoma Bravo – as well as, of course, the pending carve-out of Skype, which is being led by Silver Lake Partners. But even with all of that, the value of tech LBOs announced so far in 2009 is only $12bn – just half the $23bn announced in the same period last year. And forget about the time when the buyout barons accounted for more that one-quarter of all tech M&A spending; so far this year, the share of PE firms of overall deal flow is just 11%.

Does Wall Street run through the RedPrairie?

Brenon Daly

Contact: Brenon Daly

Along with the rising equity markets, there’s a new flow of companies that are planning to file their IPO paperwork in the next few weeks. For instance, we know of two venture-backed mobile vendors that have picked underwriters and plan to put in their prospectuses shortly. And we’re willing to bet that the expected strong offering from Fortinet, which initially filed in early August and is likely to debut before Thanksgiving, will catch the eye of quite a few VCs who have sizeable security providers in their portfolios.

Altogether, it looks like a decent IPO pipeline for VCs, as long as the equity markets hold. But what about their brethren at PE firms? We’ve seen the buyout barons file to flip a few non-tech holdings back onto the market, and the big offering from Avago Technologies (the carve-out of Hewlett-Packard’s semiconductor business by Kohlberg Kravis Roberts and Silver Lake Partners) has been above water since it hit the Nasdaq in early August. But there are still a lot of PE firms with pretty full portfolios that would like to post a realized gain – as opposed to ‘paper gains’ – before going out and raising a new fund.

So which PE-backed company is likely to hit the public market? Several sources have indicated that RedPrairie, an inventory management software vendor owned by Francisco Partners, has selected bankers and plans to ink an S-1 in the coming weeks. Francisco acquired RedPrairie in mid-2005, 30 years after the company was founded. Since the buyout, RedPrairie has rolled up six other companies. In 2008, the firm generated almost $300m in revenue. That puts RedPrairie’s revenue in the same neighborhood as rivals i2 and Manhattan Associates, but below the sales of JDA Software and Epicor Software.

A ‘new normal’ for tech M&A

Brenon Daly

Contact: Brenon Daly

With the third quarter now in the books, we’re busy tallying the buying that went on over the past three months. Not that it involves all that much work, actually. In fact, for all the talk of how much better off we are now than at this time last year, you wouldn’t know it from the M&A levels in the third quarter, which wrapped yesterday.

And just to qualify, when we say ‘better off,’ in most cases we mean ‘less worse off.’ It’s true, for instance, that jobless rates aren’t rising as fast as they once were, but they are still rising. That sentiment is mirrored in statistics covering many other areas of the economy as well, although is does go against the 15% rise in the Nasdaq over the summer.

So where do these currents and crosscurrents leave us in terms of numbers of third-quarter deals and the spending on them? In the just-completed July-September period, we recorded 740 transactions with an aggregate announced value of $34bn. That lines up nearly identically with the 733 deals worth $32bn in the third quarter of 2008, which saw the beginning of the historic credit crisis. Further, the third-quarter results continue the trend of measuring tech M&A spending in the tens of billions of dollars, compared to the $100bn quarters that we saw regularly during the boom years. Our take: there’s a ‘new normal’ in tech M&A.

Recent quarterly M&A activity

Period Deal volume Deal value
Q3 2009 740 $34bn
Q2 2009 767 $48bn
Q1 2009 654 $10bn
Q4 2008 725 $40bn
Q3 2008 733 $32bn
Q2 2008 719 $173bn
Q1 2008 836 $55bn

Source: The 451 M&A KnowledgeBase

Long an LBO target, ACS goes to Xerox

Brenon Daly

Contact: Brenon Daly

Finally, Darwin Deason does his deal. The chairman and overwhelmingly largest shareholder of Affiliated Computer Services (ACS) has had the IT services company he founded in 1988 in play for some time now. The firm was approached by an unnamed private equity (PE) shop some four years ago, but talks were scrapped in January 2006. Then came Cerberus Capital Management, which put forward a $5.9bn bid in March 2007, only to pull it some three months later as the credit markets started tightening. Finally, on Monday, Xerox said it will buy ACS for $6.4bn in cash and stock. (Incidentally, Xerox shares were worth quite a bit less after the announcement, dropping 19% in Monday-afternoon trading.)

It’s noteworthy that a strategic acquirer has replaced PE shops as the buyer of the slow-but-steadily growing services company. We would chalk that up to the recent changes in the credit market. When debt was cheap and plentiful, buyout shops could afford to give up ‘synergies,’ knowing they could make a return because of the low cost of capital. (And the synergies can add up. Xerox expects to save $300-400m in the first three years by cutting duplicate costs and other financial advantages of the combination.) ACS has some $2.3bn in debt, which Fitch gives a ‘speculative’ rating of BB.

Although Deason stepped upstairs at ACS three years ago, he still controls some 44% of the voting stock in the company. (His outsized control in the vendor comes primarily through his ownership of all of the Class B shares of ACS, which carry 10 votes per share.) Looking at the rest of ACS’ board helps to explain at least one other part of the transaction as well, the fact that ACS was advised by Citigroup Global Markets. Longtime Citigroup executive Robert Druskin has served on the ACS board since March 2008. Additionally, Evercore Partners advised the board at ACS. On the other side, JP Morgan Securities and Blackstone Group advised Xerox.

Correlated markets?

Brenon Daly

Contact: Brenon Daly

To look at the recent performance of the Nasdaq, you’d hardly know that capitalism (as we know it) almost died a year ago. The tech-heavy index was largely unchanged on Wednesday but has posted gains for three straight sessions, having added 9% so far in September. That’s part of a longer run that has seen the Nasdaq tack on 35% since the beginning of 2009 and 70% since bottoming out in early March. In fact, the index is essentially where it was a year ago, before banks started going under, the credit market froze and the US government fired up its printing presses to give us all enough money to buy our way out of the recession.

The optimism that’s been boosting the equity markets is starting to carry over to the M&A market, with several signs from big-time buyers pointing to a return to health:

  • Dell’s recent reach for Perot Systems stands as the largest tech transaction in five months.
  • Google inked its second acquisition in as many months, after being out of the market for nearly a year. (The search giant added reCAPTCHA last week after picking up On2 Technologies in early August, its first purchase of a fellow public company.)
  • Adobe and CA Inc announced their largest deals in four-and-a-half years and three-and-a-half years, respectively, in the past week.
  • Microsoft grabbed a bucketful of small companies to add technology to its ERP division, a business that has largely been shaped by a pair of billion-dollar buys earlier this decade.

Of course, we need to consider this resurgence of deal flow in the context of an overall sluggish M&A market. With a week and a half left in the third quarter, spending on deals is running at just $28bn. While that would put activity roughly on par with where it was last year, it is only half of the amount of third-quarter spending in 2007 and one-third of the total in Q3 2006. Another way to look at it: the roughly $84bn that we’ve seen so far for all of 2009 is basically what we used to see in a single quarter during the boom years.

Q3 tech M&A activity

Period Deal volume Deal value
Q3 2009 (through August 22) 672 $27bn
Q3 2008 733 $32bn
Q3 2007 825 $58bn
Q3 2006 1,029 $102bn
Q3 2005 811 $87bn

Source: The 451 M&A KnowledgeBase