Category: LBO

Goldman regains its Midas touch

Brenon Daly

Contact: Brenon Daly

Goldman Sachs is having a September to remember, after an uncharacteristically quiet run throughout 2009. We noted in our mid-year league table report that Goldman, which topped our annual rankings 2005-07, had slipped to a distant seventh place in the first half of this year. Since the beginning of September, however, the bank has regained its Midas touch.

Goldman has worked on four tech deals announced so far this month, with a total equity value of $7.9bn. (The September spending accounts for some 60% of the value of all deals that Goldman has advised on so far this year.) The transactions: sole advisor to eBay on its $2bn Skype divestiture; advisor to Intuit on its $170m purchase of Mint; sole advisor to Adobe on its $1.8bn acquisition of Omniture; and sole advisor to Perot Systems in its (relatively richly priced) $3.9bn sale to Dell, which stands as the largest tech transaction in five months.

By way of a final thought on Goldman’s return, we’d note the unusual situation that popped up in the buy-side deals that Goldman worked last week. We can’t recall the last time we saw any bulge-bracket bank get a print one day (Intuit’s purchase of Mint) and then turn around the very next day and get a print that’s 10 times larger (Adobe’s purchase of Omniture).

Take-privates are taking more money

Brenon Daly

Contact: Brenon Daly

Even though the volume of take-privates has plummeted this year, the deals that are getting announced appear to be far more competitive than they’ve ever been. At least that’s true after the LBO is announced. So far this year, we’ve seen terms get raised in four take-privates, due to either named or unnamed bidders.

The latest: On Tuesday, an unidentified private equity (PE) firm offered $8 for each share of MSC Software, topping the existing agreement for $7.63 per share that buyout shop Symphony Technology Group had with the maker of design software. The new bid added about $18m to the price of MSC. That follows post-announcement raises in the LBOs of I-many and Entrust, which increased the final purchase prices by $19m and $9m, respectively. And then there was the bidding war over SumTotal Systems between Vista Equity Partners and Accel-KKR that saw the final price come in 50% higher than the initial offer.

But in the case of MSC, we probably shouldn’t be surprised that the initial offer got bumped a bit higher. After all, it was only a scant 13% premium over the previous closing price. Shares of the company actually traded at the price proposed by Symphony just a month before the PE shop unveiled its bid. Although to be fair, much of the run had been triggered by speculation that hedge fund Elliott Associates, the vendor’s largest shareholder, was pushing for a sale of MSC. (Under the plan put forward by Symphony, Elliott would have rolled over its equity.) For the record, the proxy filed in connection with Symphony’s bid indicates that Elliott actually first broached the idea of a sale to MSC in February 2008, a time when shares were changing hands above $12 each.

PE group dials up Skype

Brenon Daly

Contact: Brenon Daly

Just a month after we speculated on an unconventional home for Skype Technologies, eBay found a rather unconventional home of its own for its VoIP subsidiary. Rather than go to Cisco, which is what we suggested as an (admittedly) far-flung idea, Skype has landed in a portfolio of a consortium led by tech buyout shop Silver Lake. Terms call for the group (Silver Lake, along with venture firms Index Ventures and Andreessen Horowitz, plus the Canada Pension Plan Investment Board) to hand over $2bn for two-thirds of Skype. EBay, which acquired Skype four years ago, will own the remaining one-third stake.

In most markets, a multibillion-dollar carve-out of a noncore asset led by a private equity (PE) firm would hardly be called ‘unconventional.’ (In fact, one could argue that type of transaction is precisely what PE firms should be doing.) But today’s market – even with the recovery that we’ve had – is hardly a healthy one. The equity markets have rallied, but investors – including the big investment groups that back the PE firms – are still skittish. Add to that, debt is still tough to come by. Those are the main reasons why buyout shops have been largely sitting on their hands recently, making a $2bn deal by a PE consortium a relatively unusual event.

Consider this fact: the Skype carve-out is the largest tech PE deal since May 2008. In fact, it accounts for almost half of all tech spending by buyout shops in 2009. So far this year, we’ve tallied 50 transactions that have an aggregate announced deal value of just $4.6bn. That’s one-third the amount during the same period last year ($13.1bn), and a mere fraction of the total the buyout barons spent during the same period in the boom year of 2007 ($101bn).

Bleak outlook for social networking M&A

-Contact Thomas Rasmussen

In a sign of just how far the social networking market has fallen, brightsolid’s $42m purchase earlier this month of Friends Reunited from ITV Plc stands as the largest deal in the sector so far in 2009. The price is a mere 5% of the value of the largest social networking acquisition in 2008, which was AOL’s $850m all-cash pickup of Bebo. (We would also add that the sale of Friends Reunited netted ITV just one-fifth the amount it originally paid for the property in 2005.) On top of the notably smaller transactions, deal flow so far this year has been characterized by relatively paltry valuations. Friends Reunited garnered just 1.6 times trailing sales, compared to the estimated 42 times trailing revenue that Bebo got from AOL. Add all that together and it’s pretty clear that the bubble of social networking M&A has popped. In the space so far this year, we tally just 28 deals worth a total of $55.5m, compared to 53 transactions valued at more than $1.3bn in 2008.

As an aside, we would note that the acquisitions of Friends Reunited and Bebo have more in common than just ranking as the largest deals of their respective calendar years. The stalking horse bidder for Friends Reunited, Peter Dubens through his investment vehicle Oakley Capital Private Equity, has a close business relationship with Bebo founder Michael Birch. Dubens and Birch formed PROfounders Capital earlier this year under Dubens’ Oakley Capital umbrella. Oakley Capital reportedly offered to buy Friends Reunited for $25m, but declined to bump up its bid above even one times sales. Without reading too much into that, we might be tempted to conclude that except for Facebook, the little value that remains in most social networks is likely to only decline.

What’s the value of advice on the Entrust LBO?

Brenon Daly

Contact: Brenon Daly

The ‘go-shop’ period at Entrust came and went a month ago, but on Friday the security vendor nonetheless got a richer offer in its three-month-old leveraged buyout. The bidder? Thoma Bravo, the same buyout shop that has had an agreement in place since April to acquire Entrust. Originally, Thoma Bravo offered $114m, or $1.85 per Entrust share, but as the company’s shareholders were set last Friday to vote on it, Thoma Bravo bumped up its bid to $124m, or $2 for each Entrust share. The buyout shop says that is its best and final offer for Entrust.

Thoma Bravo topped itself despite having Entrust’s board unanimously back the initial $1.85-per-share bid. The raise also came despite both of the main proxy advising outfits backing the original offer, which valued Entrust at less than 1x sales, on the basis of enterprise value. If shareholders had actually listened to both Glass, Lewis & Co and Proxy Governance Inc, they would have shortchanged themselves $10m. (And shareholders have already suffered enough by holding Entrust, which has basically traded down over the past four years, with only brief interruptions.)

Undoubtedly, the proxy firms will (once again) throw their support behind the new and improved buyout bid ahead of the shareholder vote, which is slated for July 28. But any endorsement sort of strains credibility given that they already backed one deal that the would-be buyer has acknowledged was too cheap.

Q2 ends with a whimper

Brenon Daly

Contact: Brenon Daly

The second quarter is in the books, and we would suggest that the M&A tally is a bit deceptive. Yes, both the number of tech deals and the announced deal values hit their highest levels in a year. But lurking behind that rebound is the fact that M&A tailed off dramatically in June. In fact, the final month of the quarter accounted for just 16% of the total M&A spending in the period. The breakdown of the overall $48.4bn in the second quarter: April-May spending hit $40.7bn, while June spending was a scant $7.7bn.

We noted recently how June saw the return of gun-to-the-head sales of many tech companies, both large and small. That is reflected in the dramatic change in average deal size over the course of the quarter. (Granted, average deal size is a crude measure, but it is illustrative nonetheless.) In the April-May period, the 517 deals had an announced deal value of $40.7bn, yielding an average purchase price of $78m. In June, the average sale was less than half that level: 233 deals with an aggregate spend of $7.7bn, for an average of $33m. That’s a worry trend as we head into the second half of the year.

Overall tech M&A

Period Deal volume Deal value
Q2 2009 750 $48bn
Q1 2009 646 $9bn
Q4 2008 723 $40bn
Q3 2008 737 $32bn
Q2 2008 721 $173bn

Source: The 451 M&A KnowledgeBase

June gloom

Brenon Daly

Contact: Brenon Daly

Whether or not the rebound got ahead of itself, the market has certainly tightened up this month. And no, we’re not talking about the equity market. (Although the sentiment is applicable there, as well, with the Nasdaq recently dipping to its lowest point in a month.) Instead, we’re talking about the M&A market. After a furious start to the second quarter, dealmaking has slipped back to the sluggish pace we saw in the first few months of 2009.

A quick glimpse at the numbers: In both April and May, we saw some 250 deals worth about $20bn in each month. So far this month, we’ve had about 205 deals worth a scant $8bn. With just three business days to go in June, we’re looking at spending being down about 60% from what it was in each of the first two months of the quarter.

We’ve also noticed the recent return of a trend that we saw more often in the opening months of 2009: the involuntary sale. In both large and small transactions, sellers have increasingly found themselves forced to take any offer that comes in. We noted that this week in the startup world, as LucidEra was turned over to a workout firm to sell its carcass. And on a larger scale, bankrupt Nortel Networks gave up on ever emerging as a viable company and began the painful process of liquidation sales. The first deal gives some sign of the resignation: Nortel sold its most valuable unit for what is likely to be less than 1x cash flow.

Second-quarter deal flow

Period Deal volume Deal value
April 2009 263 $21bn
May 2009 242 $19bn
June 2009 205 $8bn

Source: The 451 M&A KnowledgeBase

UPDATE: Borland gets higher bid

Brenon Daly

In a note sent out to clients before the market closed Thursday, we speculated that Borland was likely to get a bid that topped its existing agreement with Micro Focus. (See the full post.) Shortly after the market closed, Borland indicated an unidentified suitor (Company A) raised its bid to $1.25 for each share of Borland, eclipsing the $1.15 per share that the boards of both Borland and Micro Focus have agreed to. Borland shareholders had been scheduled to vote on the deal, which was originally announced May 6, on July 22. The identity of Company A wasn’t revealed. In our earlier post, we noted our suspicions that the bidder might be Embarcadero Technologies, a portfolio company of Thoma Cressey Bravo. However, one informed source has subsequently told us that is not the case.

The disappearing LBO

Brenon Daly

Contact: Brenon Daly

With private equity (PE) firms bidding against one another (as was the case with SumTotal Systems) and bidding against strategic buyers (as was the case with Borland), we might be tempted to think that the tech buyout barons are back. Umm, not really. So far this year, PE firms have accounted for just $3bn of the almost $53bn in announced M&A spending. (For more, see our second-quarter M&A report.)

To put that into perspective, consider that in 2006 there were nine individual transactions that topped the $3bn amount that we’ve tallied for the entire first half of this year. In 2007, there were another six LBOs that each eclipsed the aggregate PE spending so far in 2009.

Viewed on a relative basis, the diminished activity of financial buyers compared to strategic acquirers is even more dramatic. Not too long ago, buyout shops could outbid public companies simply because credit was cheap. That helped PE firms account for nearly one-quarter of every dollar spent on tech deals. The level now is closer to a nickel of every dollar.

LBOs as percent of overall tech M&A spending

Period Percent
2009 YTD 6%
2008 9%
2007 27%
2006 21%
2005 15%

Source: The 451 M&A KnowledgeBase

Corporate dealmakers ready to deal

Brenon Daly

Contact: Brenon Daly

Companies expect to be busier with M&A during the rest of the year than they’ve been so far in 2009, even though they’re likely to pay steeper prices for their deals. That’s the takeaway from our recent survey of corporate development executives at more than 60 technology firms. The survey, which closed Monday evening, updated our full report from last December and will figure into our midyear M&A webinar on Thursday.

If not bullish, the projections in our midyear survey are much less bearish than they were in our previous survey at the end of last year. Six out of 10 respondents said their companies will pick up their rate of shopping, while just one out of 10 projected their M&A pace will tail off for the rest of 2009. That’s a notable swing back to optimism from the December survey, when just four out of 10 said they expected to be busier, and two out of 10 said they would slow their acquisition pace.

The view from corporate dealmakers is significant because, collectively, they set the tone in the tech M&A market. So far this year, strategic buyers have accounted for $50bn of the $53bn in announced deal values, with financial acquirers tallying just $3bn. In terms of how they assess the buying environment, however, the view is pretty evenly split. Roughly one-third of the respondents said valuations of private technology companies would fall further in the second half of 2009, with another one-third saying they would hold steady, and another one-third predicting they would rebound before the end of the year.