Category: LBO

How do you say ‘please come back’ in Korean?

-Contact Thomas Rasmussen

When SanDisk released its dismal earnings this week, dismayed shareholders hastily headed for the hills. The exodus caused SanDisk’s stock to plunge 25%. In the fourth quarter of 2008, the flash memory giant lost $1.6bn, pushing its total loss for the year to $2bn. This red ink from operations was exacerbated by the company’s $1bn of acquisition-related write-downs stemming from its $1.5bn acquisition of msystems in July 2006. In the days following the dire news, SanDisk has been trading at a valuation of around $2.2bn. That’s a far cry from the $5.6bn that Samsung offered for SanDisk in September.

To put the decline in perspective, SanDisk’s three largest outside shareholders – Clearbridge Advisors, Capital International Asset Management and Capital Guardian Trust, which collectively own more than 15% of SanDisk (as of September 30) – suffered a paper loss of more than $700m since the day Samsung walked away from the proposed deal. Given this, we wouldn’t be surprised if shareholder ire forced SanDisk to reconsider its strategic options this year. On its earnings call this past Monday, the company reiterated that its board is indeed open to deal with any interested parties, which begs the inevitable question: Who might be willing buyers?

With private equity largely stymied and longtime partner Toshiba repeatedly stating that it’s not interested in a deal, Samsung is still the most logical fit. It has the cash, has shown a willingness to pay a solid premium, and would integrate well with SanDisk’s overall portfolio of products. In addition to its valuable intellectual property assets (which would eliminate those ugly royalty fees) and flash and solid-state drive lineup, SanDisk would instantly give Samsung the second-largest share of the music player market, behind only Apple. Perhaps it’s time for SanDisk CEO Eli Harari to brush up on his Korean, or at least learn how to say ‘please come back’ in that language.

A frozen January

Brenon Daly

Contact: Brenon Daly

In the equity market, there’s a well-known investing phenomenon called ‘the January effect.’ The basis of this is that stocks, particularly small-caps, tend to rise in the first week or two of the New Year as investors buy back some of the names they might have sold for tax reasons at the end of the prior year.

Since the first month of 2009 is in the books, we decided to investigate whether there was a similar January effect on the M&A market this year. Based on the last few years, we’d note that dealmaking tends to start slowly. In each of the past three years, spending on M&A in January has come in significantly below a month-by-month average for the year.

But far more dramatically, the deal totals indicate a new January effect – this year’s market is frozen. Spending plummeted to just $2.1bn in the first month of the year. The reason? The disappearance of the big deal. Autonomy Corp’s $775m all-cash purchase of Interwoven stands as the largest transaction of 2009 so far. However, in January 2008 there were three deals larger than Autonomy-Interwoven, and January 2007 posted six deals larger.

M&A in January

Period Deal volume Deal value % of total annual M&A spending
January 2005 208 $40.5bn 11%
January 2006 321 $16.8bn 4%
January 2007 373 $20.9bn 5%
January 2008 333 $17.6bn 6%
January 2009 204 $2.1bn N/A

Source: The 451 M&A KnowledgeBase

New face at the head of the league table

Brenon Daly

Contact: Brenon Daly

Fittingly for a year that saw an unprecedented amount of upheaval on Wall Street, Barclays came from nowhere in 2008 to take the top spot on the 451 Group’s annual league table. And when we say it came from nowhere, we mean that literally: The British bank didn’t have a hand in a single IT deal involving a US-based company in 2007. It owes its dramatic rise to its purchase of Lehman Brothers, a bank that figured at the sharp end of the ranking for each of the past three years.

The unexpected ascent of Barclays snapped a three-year run by Goldman Sachs as busiest tech adviser, with Goldman slipping back to second place. JP Morgan Chase, boosted by its acquisition of Bear Stearns in May, rebounded to third. It was a notable comeback for JP Morgan, which had plummeted to 11th place in 2007. Furthermore, JP Morgan was one of the only major banks to actually increase both the number of deals it worked and the value of those deals, year over year.

However, we would quickly add that these banks were the best in a very bad year. Consider the fact that Barclays, which headed our 2008 ranking with $30.6bn worth of advised deals, would have barely squeaked into 10th place on our 2007 ranking. Meanwhile, Goldman’s total amount of advised deals last year ($26.8bn) was just one-third the previous year’s tally ($78bn) at the bank. (Note: We will be sending out an executive summary of the league table in the daily 451 Group email on Tuesday, with the full report available later this month.)

Overall 2008 league table standings

Rank Bank 2007 standing
1 Barclays N/A
2 Goldman Sachs 1
3 JP Morgan Chase 11
4 Citigroup 4
5 Evercore Partners 8

Source: The 451 M&A KnowledgeBase

Polishing off Aladdin

Brenon Daly

Contact: Brenon Daly

After almost five months of sometimes-heated negotiations, buyout shop Vector Capital and Aladdin Knowledge Systems have agreed to take the authentication vendor private. The accord comes after two formal price adjustments (one up, one down) that left the final deal valued at $160m. Vector plans to slot Aladdin into SafeNet, which it acquired in March 2007 for $634m.

Vector’s two security purchases stand in sharp contrast to each other, since the SafeNet transaction went through with a minimum of histrionics. Consider that SafeNet took just five weeks to close, compared to the drawn-out battle for Aladdin, which included the threat of a proxy fight. Part of that may be explained by the relative valuation of the two deals. Vector paid about 2x trailing 12-month sales for SafeNet, twice the multiple it is paying for Aladdin. That discount compares to a roughly 40% slump in the Nasdaq during the time between the two acquisitions.

Where did you go, LBO?

Brenon Daly

Contact: Brenon Daly

We finished counting all of the nickels and dimes from last year’s M&A spending and, as expected, we’re looking at a rather paltry total. Overall, acquirers across the globe announced tech deals worth $302bn in 2008, down 30% from the total in 2007. (We explore the reasons for the decline – and what it will mean for dealmaking this year – more fully in our 2009 M&A Outlook.)

Perhaps the most interesting point about M&A last year, which goes a long way toward explaining the one-third decline, is the fact that we saw a sharp contrast in the dealmaking activity of strategic and financial acquirers. For the most part, corporate shoppers continued to buy, with the number of dollars spent dropping ‘just’ 12% from the previous year.

On the other hand, PE shops slashed their dealmaking by 77%, spending roughly the same amount on tech LBOs last year that they did in 2004. And given the state of the current credit market – along with some of the painfully ill-advised bets they made on portfolio companies when the markets were smiling – we can’t imagine that situation will unwind enough to spur much activity in tech LBOs in 2009. Indeed, nearly nine out of 10 corporate development officers we surveyed in mid-December said they expected even less ‘competition’ in deals from PE firms this year.

Annual deal flow

Year Strategic acquisitions Financial acquisitions Total
2008 $275bn $27bn $302bn
2007 $314bn $118bn $432bn
2006 $359bn $98bn $457bn

Source: The 451 M&A KnowledgeBase

Corporate dealmaking

Brenon Daly

Contact: Brenon Daly

Since our annual survey of corporate development executives is currently being filled out by those dealmakers, we thought we’d take a quick look at business there. (Note: If you are a corporate development officer and would like to take part in our survey, please email me and I will send you a copy. Those who participate will get a full look at the results, plus additional comparisons with the previous year’s findings. See that report here.)

At first glance, corporate spending looks pretty healthy, roughly matching the levels of the previous three years. (For our purposes, we searched our M&A KnowledgeBase for acquisitions announced this year by companies that trade on the Nasdaq or NYSE.) Our first observation is that US companies are pretty much the only ones doing any shopping. Their spending accounts for three-quarters of all tech M&A spending that we’ve tracked this year, compared to about half of the total in each of the past two years.

However, we would quickly add that (not surprisingly) deal flow has been drying up as the year has gone along. In the third quarter, the total value of acquisitions by US publicly traded acquirers hit just $16bn, down from $144bn in the second quarter and $38bn in the first quarter (second-quarter results were inflated because the four largest deals of the year, including three mammoth communications transactions, were announced in the summer). In the next week, we’ll tally what corporate development executives predict for 2009 and have a report on that.

Acquisitions by US listed companies

Period Deal volume Deal value
January-November 2005 945 $204bn
January-November 2006 1,084 $251bn
January-November 2007 961 $193bn
January-November 2008 793 $218bn

Source: The 451 M&A KnowledgeBase

Bargains for holiday shopping

Brenon Daly

Contact Brenon Daly

As we flip the calendar for the final month of 2008, we had to check that we weren’t in fact mistakenly looking at 2005’s calendar, at least in terms of M&A. That’s because deal flow this year is looking a lot like it did three years ago. So far, we’ve seen some 2,687 deals with an announced value of $286bn, compared to 2,761 deals worth $336bn during the same period of 2005. Compared to last year, spending is down some 37%.

As for what we might expect from financial and strategic shoppers in the final month of 2008, we think they’ll be mirroring retail shoppers. In other words, they’ll be looking for bargains. (We would point to the unprecedented ‘door-buster’ markdowns that sellers used to lure shoppers over the Black Friday weekend.) Already, we’ve seen the price tag of an average tech deal shrink to $106m this year. That’s down from an average of $134m in 2007 and $122m in 2005. Granted, this is a raw figure of all tech spending divided by the number of deals. But the direction of the aggregate number each year is telling.

Year-to-date tech M&A

Period Deal volume Deal value
January-November 2004 1,871 $151bn
January-November 2005 2,761 $336bn
January-November 2006 3,693 $428bn
January-November 2007 3,384 $455bn
January-November 2008 2,687 $286bn

Source: The 451 M&A KnowledgeBase

LBOs without the ‘L’

Brenon Daly

In the current economy, all debt is suspect. That’s one of the main reasons we’ve seen the value of private equity-backed deals plummet by 84% to just $26bn. (For context, that’s just half the level ($56bn) we saw for all of 2005, before the buyout barons really get swinging.) And, according to senior bankers in our just-released Tech Banking Outlook Survey, the leveraged buyout (LBO) market isn’t expected to pick up in 2009.

More than twice as many bankers expect the dollar value of their work with PE shops to decline next year, compared to those who expect it to rise (57% anticipate a decline while only 22% predict an increase). That’s a dramatic shift from last year, when more bankers projected an uptick of LBOs in the coming year than those who saw the business slide (44% expected an increase while 37% saw a decline).

As for the frozen credit market, some PE firms are not even bothering to look there for financing. Several financial sources have told us recently that LBOs are being penciled out with buyout firms covering half the purchase in equity. In some cases, they’re planning to use all equity. Again, that’s a dramatic shift from recent years, when PE firms covered just 20% or so of the purchase in equity.

To some degree that makes sense, given that they are sitting on billions in cash while banks are very reluctant to dole out any of their funds. Still, it means we may have to erase the ‘L’ from LBO, or at least qualify future financial deals as ‘LLBOs’, as in ‘less-leveraged buyouts.’ It’s yet another sign of the times.

Projected change in dollar value of PE mandates in coming year

Year Percentage that expect increase Remain the same Decrease
2007 (for 2008) 44% 19% 37%
2008 (for 2009) 22% 21% 57%

Source: The 451 Tech Banking Outlook Survey, November 2008

Credit crisis hits home for VeriSign

-by Thomas Rasmussen

In VeriSign’s 3rd quarter earnings conference call last night, interim CEO Jim Bidzos detailed its divesture progress. The gist: There is none.

It was essentially a repeat of its second quarter call. Bidzos insists that it is “this” close. He reiterated that one of the three non-core businesses is close to being divested, possibly before the end of the year (our money is on Communications). Bidzos offered up the reason for the holdup: The would-be acquirer needs financing. This is yet another unfortunate example of frozen credit markets hampering M&A.

Google and Yahoo break up

-by Thomas Rasmussen

The Department of Justice announced this morning that it would file suit to block the planned advertising pact between Google and Yahoo. Google followed quickly by axing the deal. YHOO is up 8% in mid-day trading while the overall market is down sharply. The Google/Yahoo breakup has sparked renewed hope among shareholders that Microsoft could return to the table. It also opens up the possibility of a long rumored partnership between Time Warner’s AOL and Yahoo.