Category: LBO

Empire Capital: rain-making in security M&A

Brenon Daly

Contact: Brenon Daly

For the second time in less than a year, a micro-cap security company in which hedge fund Empire Capital holds a big position is being taken off the board. On Monday, Entrust said it agreed to a $114m offer from buyout firm Thoma Bravo. Terms call for the acquirer to pay $1.85 for each of the 61.3 million Entrust shares outstanding. The roughly 22% premium essentially values Entrust where it was last October. (The deal also carries a ‘go-shop’ provision.)

Empire, which has a seat on Entrust’s board, holds about 11.8 million shares of the company, or 19% of the total. (That means the hedge fund’s payday for its stake will be just $22m.) Although the board has signed off on it, the terms of the buyout aren’t exactly staggeringly rich: Entrust has $24m in cash and no debt, lowering the company’s enterprise value to just $90m. Entrust did about $100m in sales in 2008 and was expected to record only a slight dip in revenue this year, according to Wall Street projections.

The valuation of less than 1x trailing revenue for Entrust is just half the level of Tumbleweed Communications, the previous security company that Empire was involved with. In a trade sale last June, Tumbleweed got picked up by French rival Sopra. The deal valued Tumbleweed at nearly 2x trailing sales. Of course, it was a different time back then. For its part, Entrust was trading at about $3 on the day Sopra announced the Tumbleweed acquisition.

PE firm calculates SumTotal

Brenon Daly

Contact: Brenon Daly

A half-decade ago, a pair of struggling public companies joined together in an effort to capitalize on the fragmented e-learning market. Click2Learn.com and Docent, which had beat up on each other for years, merged into a single company under the name SumTotal Systems. (Shareholders of Click2Learn held 52% of the combined entity, with Docent shareholders owning the rest.) The merger did little to help SumTotal’s performance on the Nasdaq. Since the pairing, which closed in mid-March 2004, the stock had dropped from above $8 to a low of $1.33 last month.

Earlier this week, Vista Equity Partners floated a bid of $3.25 for each of the 31.8 million shares of SumTotal outstanding. The buyout firm owns about four million SumTotal shares, or about 12.6% of the total. Vista started to accumulate its position in September, when the stock was just under $5, according to US Securities and Exchange Commission filings. Vista is the company’s largest shareholder. In addition, the second-largest holder, Discovery Group, has indicated that it wants SumTotal to sell the business. For its part, SumTotal (advised by RBC Capital Markets) has said only that it is reviewing the offer.

Vista’s unsolicited offer for SumTotal has more than a few echoes of Vector Capital’s recent grab of Aladdin Knowledge Systems. Both unsolicited bids came from San Francisco-based PE shops that had amassed a large stake in each company. Both valued the targeted company at less than 1x trailing sales, on enterprise value. (And somewhat unusually, both offers included ‘go-shop’ provisions.) There is one crucial difference, however, between the two targets: SumTotal isn’t profitable, and in fact has never turned a profit. Altogether, it has rung up an eye-popping $353m in accumulated deficit.

Tough exits for VCs

Brenon Daly

Contact: Brenon Daly, Thomas Rasmussen

After being frozen for more than six months, there were some signs of a thaw this week in the tech IPO market. Chinese game maker Changyou.com enjoyed a strong debut on Thursday, and only inched down slightly in the following session. In addition, language software maker Rosetta Stone set the terms of its planned offering earlier in the week.

While the offerings are encouraging from a capital markets perspective, the same can’t be said for the VC community. The IPOs of Changyou.com and Rosetta Stone won’t mean a payoff for any of the Sand Hill Road crowd. (Changyou.com is a spinoff from online portal Soho, while Rosetta Stone counts a pair of buyout shops as its majority owners.) Of course, VCs have long since given up on betting on IPOs to boost their returns. Most acknowledge that for every portfolio company that does make it onto the public market, nearly 10 startups will get snapped up in a trade sale.

Unfortunately, there’s bad news on the M&A front, as well. My colleague Thomas Rasmussen calculated that the median valuation in the sale of VC-backed companies in the first quarter of 2009 slumped to 2.1x trailing 12-month (TTM) sales, compared to 3.8x TTM sales during the same period last year. Granted, that multiple was about twice as rich as first-quarter sales of non-VC-backed companies. But we would be quick to add that the 2.1x TTM sales multiple essentially matches the level for non-VC-backed startups in the first quarter of 2008. For more on first-quarter valuations and overall deal flow, see our first-quarter M&A report.

Q1 M&A: Recession hits deal-making

Brenon Daly

Contact: Brenon Daly

We’ve just finished tallying the first-quarter tech M&A numbers, and the picture is pretty bleak. In the first three months of the year, there were just 625 tech and telecom transactions, with total spending in the quarter hitting a mere $8bn. Compared to the first quarter of 2008, the number of deals dropped by about one-quarter, while spending plummeted 85%.

The main reason for the sharp decline in spending is the disappearance of big deals. In fact, for the first time in the seven years we’ve kept records on tech M&A, buyers didn’t announce a single transaction worth more than $1bn during the quarter. During 2006 and 2007, we saw an average of about 18 deals announced each quarter that were valued at more than $1bn. Even last year, when the current recession began to be felt, we still saw an average of some nine billion-dollar-plus deals each quarter. (However, on Wednesday, which is the first day of the second quarter, Fidelity National Information Services said it would acquire Metavante for almost $3bn in an all-stock deal.) The largest single transaction in the first quarter was Autonomy Corp’s $775m purchase of Interwoven.

Projecting annual totals from a single quarter is hardly an accurate way to predict deal flow, particularly in a lumpy business like M&A. (The Fidelity National-Metavante transaction underscores that.) Nonetheless, we would note that right now, 2009 is on track to post the lowest deal spending totals since the Internet bubble burst. The current low-water mark was hit in 2003, when spending totaled just $61bn. Since then, tech M&A has boomed, with spending in each of the past four years topping $300bn. But the way it looks now, 2009 is shaping up as a year when we could very well measure annual tech M&A spending in the tens of billions of dollars, rather than hundreds of billions of dollars. We’ll have a full report on first-quarter M&A on Thursday.

Quarter-by-quarter M&A totals

Period Deal volume Deal value
Q1 2009 625 $8bn
Q4 2008 721 $40.7bn
Q3 2008 733 $32.2bn
Q2 2008 716 $173.2bn
Q1 2008 835 $55.2bn

Source: The 451 M&A KnowledgeBase

Spring cleaning

Brenon Daly

Contact: Brenon Daly

For many tech companies, it’s time for a bit of spring cleaning. Specifically, there’s been a fair amount of sweeping out of corner offices. Last week saw Time Warner turn over the reins of its struggling AOL unit to a former Google sales executive. (Yes, we share the puzzlement around Tim Armstrong’s move.) Today, Internap Network Services got a fresh face at the top as wheeler-dealer Eric Cooney had his first day as chief executive at the beaten-down networking company. And in just two weeks, John Thompson ends a decade-long run as CEO of Symantec, turning over the security and storage giant to current COO Enrique Salem.

Amid all these moves, we wonder if the sweeping changes in companies’ executive suites will be accompanied by some sweeping out of companies’ portfolios. In the case of AOL, we’re pretty sure that the new appointment will hasten a sale of the unit. (My colleague Thomas Rasmussen noted last summer the concerning ‘lack of urgency’ at Time Warner over AOL, even as subscribers continued to plummet.) When Symantec announced last November that Salem would take the top spot, we speculated that NetBackup, Symantec’s backup and recovery unit, could find its way onto the auction block.

But what about today’s appointment at Internap? We wonder if the new leadership might not take a fresh approach to its underperforming content delivery network (CDN) unit. Internap’s big move into CDN came in October 2006, when it paid $217m in stock for VitalStream Holdings. Internap has acknowledged that it overpaid for the company, writing down a chunk of the purchase price.

And, as my colleague Jim Davis noted in a Tier1 report last week, the performance of Internap’s CDN business has lagged that of its rivals. In fact, Internap’s CDN unit has posted revenue declines for three straight quarters. We would hasten to add that the company’s just-appointed CEO has a solid M&A record behind him. In his previous post as head of Tandberg Television, Cooney oversaw a number of acquisitions before selling the company to Ericsson in early 2007. Could he be planning some dealmaking around Internap’s CDN business?

M&A at Accellos

Brenon Daly

Contact: Brenon Daly

Another supply chain management (SCM) rollup is getting rolling. Colorado Springs, Colorado-based Accellos has already closed four acquisitions and has a letter of intent in place for its fifth. Backed by a handful of private equity (PE) firms, Accellos began shopping back in October 2006 with the double-barreled purchase of Headwater Technology Solutions and Radio Beacon. The pair of deals gave Accellos $15m of combined revenue out of the gate. The company added one company in both 2007 and 2008.

As it was closing the purchase of Prophesy Transportation Solutions last September, Accellos also pulled in a $28.5m second round of financing. (That brought its total funding to $54m, although it still has $20m of that in the bank.) Accellos, which projects that it will wrap this year with some $45m in sales, says it’s only about halfway through its shopping spree. (It’s looking for companies with revenue of $4-8m.) The company indicated at this week’s Montgomery Technology Conference that it will probably need to close a total of 9-10 deals in coming years to hit its goal of more than $100m in annual sales.

If Accellos’ strategy sounds familiar, it’s because at least two other PE-backed companies have also set about rolling up the SCM market. Battery Ventures picked up HighJump Software for $85m last May, and then tacked on BelTek Systems Design last November and Insight Distribution Software a month ago. And since Francisco Partners acquired RedPrairie in May 2005, the company has inked seven acquisitions.

Omniture: the optimistic opportunist

-Contact Thomas Rasmussen

After digesting its $382m double-down acquisition of competitor Visual Sciences last year, Web analytics firm Omniture is bullish on buying. At the Pacific Crest Securities conference last week, the company outlined its M&A strategy, which essentially boils down to one word: opportunistic. It tucked in its struggling competitor Mercado Software for $6.5m in November 2008, adding an estimated $12m to its top line. The company had raised $66m in venture capital over the past 10 years. Omniture told us some of Mercado’s large customers had in fact approached it to do the deal. Moreover, Omniture said its remaining privately held competitors Coremetrics and WebTrends are struggling. The company added that it’s seeing an increasing amount of their customers transition over (some even in mid-contract), and it’s ready to deal, as long as it’s at 2009-type discounts.

Not so fast, say the two firms, which we estimate ring up combined revenue of just south of $200m. WebTrends, which PE shop Francisco Partners took off of NetIQ’s books in 2005 for $94m, says that despite a shakeup in management, the company is well positioned. It cites profitability, consistent quarter-over-quarter growth, its highest revenue quarter in its history last quarter, and says it has no need for further funding from its rich backer. (Reports Thursday indicated that Francisco is set to begin raising a third fund, targeting at least $2bn.) Meanwhile, Coremetrics seems to have overindulged on venture capital, closing a $60m series E round last March, bringing its total raised to date to $111m. We tend to get skeptical when this happens, especially in this environment. However, CEO Joe Davis assured us that having shelved further funding-related expansion plans, the company has the majority of the latest round in the bank. Its January restructuring will return the company to cash-flow neutral this month, and cash-flow positive going forward, and it is on track to grow revenue 20% year over year. The CEO added, “Rumors of my death have been greatly exaggerated by my competitor.”

With more than $80m in cash and short-term investments, its profitable standing and surprisingly upbeat outlook, Omniture can certainly handle a few more tuck-ins. Will it scoop up its feisty rivals? At the moment, it certainly does not look like it. In fact, competitors Coremetrics and WebTrends, which haven’t been in the market since 2006 and 2007, respectively, say they are looking at doing some buying of their own and have the cash to do so.

Omniture M&A

Completed Target Enterprise value Revenue multiple Price per customer
November 2008 Mercado Software $6.5m 0.5x* $32,500*
January 2008 Visual Sciences $382m 5.0x $240,302
December 2007 Offermatica $65m 7.2x* $650,000

Source: The 451 M&A KnowledgeBase *451 Group estimate

Done dabbling in VC

Brenon Daly

Contact: Brenon Daly

During the tech recession at the beginning of this decade, many of the venture efforts started by both corporations and investment banks ground to a halt and quietly went away. In the current downturn, it’s the venture efforts from the buyout shops that seem to be vanishing. Over the past year, marquee PE firms The Carlyle Group and 3i have both shuttered their VC investment programs. On Wednesday, Jafco Ventures announced that it had picked up former Carlyle venture capitalists Nick Sturiale and Jeb Miller.

The pair had only recently moved over to Carlyle to help accelerate its planned push into VC. Washington, D.C.-based Carlyle had raised some $1.4bn in three US funds, dating back to 1997. The funds not only invested in early-stage ventures, but also financed expansion-stage growth companies and smaller buyouts. The move comes after UK-based 3i stopped its early-stage investments, and the head of US tech investments, Sandy Miller, joined late-stage venture firm Institutional Venture Partners.

The fact that some ‘merchants of debt’ are done dabbling in venture capital is understandable given the pressing problems in their core business of taking companies private. With the credit market largely closed and the IPO window firmly shut, PE shops have virtually no chance to book any gains. In fact, few – if any – LBO firms are talking about gains in their current portfolio. The general business slump, exacerbated by the heavy debt loads of many of these companies, has already driven a few into bankruptcy. This has been particularly true of the retail companies taken private in the past few years. But the Chapter 11 contagion is likely to spread to other sectors – including technology.

Divesting at any costs

Brenon Daly

Contact: Brenon Daly

We recently noted how VCs are having to settle for scrap sales as they go through a bit of portfolio clean-out. But, hey, at least the value destroyed in each of the companies is only in the tens of millions of dollars. Companies that have been recently cleaning out their own portfolios in the form of divestitures have been eating hundreds of millions of dollars. Even billions of dollars.

Last week, two companies were in the news for what we would consider ‘divest at any cost’ transactions. First up, Motorola unwound its two-year-old purchase of Good Technology. After paying about $500m in November 2006 for Good, we would guess that Motorola almost certainly received less than $50m in selling the mobile messaging infrastructure vendor to privately held Visto. (At least there was something left to sell. The same can’t be said of Intellisync, which Nokia bought three years ago for $354.3m but recently said it will be shuttering.)

More dramatically, Nortel Networks looks likely to pocket just two pennies for every $1,000 that it handed over for Alteon WebSystems in mid-2000. (Keep in mind, however, that Nortel paid the $7.8bn total is stock, not cash.) The bankrupt telecom equipment vendor has put Alteon on the block, and the reported frontrunner is Israel-based Radware, which has put forward a bid of some $14m. (Since Nortel filed for Chapter 11, Alteon is being sold under an auction process run by the bankruptcy court, and other bidders could emerge.) As a final thought on both the Motorola and pending Nortel divestitures, we would note that both castoff divisions are landing in other companies, rather than a buyout shop.

Buyout barons go big, then go home

Brenon Daly

Contact: Brenon Daly

After totaling about $100bn in both 2006 and 2007, the aggregate value of acquisitions by private equity (PE) firms dropped to $27bn last year. And the way 2009 is starting out, we’re certainly looking at another down year for leveraged buyouts (LBOs). So far this year, we’ve seen just half the number of financial deals that we saw during the same period in each of the past two years, and spending has plummeted. The largest LBO so far this year is a mere $60m.

Obviously, the dealmaking climate has changed dramatically over the past three years for the buyout barons, who were once able to draw enough cheap credit to pay top dollar for some technology properties. On occasion, PE firms were able to outbid strategic buyers for companies, even though corporate buyers should be able to wring out more cost savings not available to buyout shops, which (theoretically) should allow them to pay more.

To get a sense of just how far valuations have plunged, compare the price that Chicago-based PE shop Madison Dearborn Partners paid for CDW in May 2007 with the current valuations of VARs that are still publicly traded. (We were thinking about that last week because Insight Enterprises lost half of its value when it said it would have to restate earnings going back a decade.) In its $7.3bn buyout, CDW went private at 1x trailing 12-month (TTM) sales and about 15x TTM EBITDA. In contrast, both Insight and PC Mall currently trade at just one-tenth the price-to-TTM-sales multiple (0.08x sales for both companies) and about one-fifth the price-to-TTM-EBITDA multiple (2.3x for Insight and 3.2x for PC Mall.)

PE deal flow

Period Deal volume Deal value
January 1 – February 17, 2009 20 $149m
January 1 – February 17, 2008 36 $879m
January 1 – February 17, 2007 44 $9.8bn

Source: The 451 M&A KnowledgeBase