Category: LBO

Less of the same for October M&A

Brenon Daly

With October standing as the worst month for the Dow Jones Industrial Average in more than a decade, we thought we’d see what the market’s rout did to M&A totals. Essentially, October continued the sluggishness that we’ve already seen in the first three quarters of 2008, with M&A falling about one-third from October 2007. (See our full report on Q1-Q3 activity.) And while the drop in dealmaking seems sharp, it pales in comparison to the losses on Wall Street, at least on a relative basis. Consider this: the October declines of the Dow and the Nasdaq (14% and 18%, respectively) account for exactly half of the total losses for both indexes in 2008. Ouch.

Also similar to the first three quarters of the year, big buyers sat out October. Only three transactions valued at more than $1bn were announced last month. (And, we’d be quick to add, one of them – the $2.3bn unsolicited bid for Atmel – has been rejected and, if history is any guide, probably won’t go through.)

Even with the continued bearishness in the M&A markets, the activity in October does offer a glimmer of hope for the return of a vibrant deal economy. At least things didn’t get worse. And if things continue to not get worse, it’s not too much of a stretch to see them starting to get better.

October deal flow

Month Deal volume Deal value Deals worth $1bn+
October 2006 330 $37bn 8 (Google-YouTube, Open Solutions LBO)
October 2007 309 $32bn 5 (Nokia-Navteq; SAP-Business Objects)
October 2008 238 $23bn 3 (CenturyTel-Embarq, unsolicited bid for Atmel)

Source: The 451 M&A KnowledgeBase

Fixed on the market

Brenon Daly

Although the IPO market is closed right now, some VCs are nonetheless steering – and steeling – their portfolio companies for a public market payday. Of course, that often means passing up a trade sale, which holds out the appealing prospect of cash on close. But Menlo Ventures’ John Jarve pointed out in his talk at IBF’s early-stage investment conference that those sales can be shortsighted. Consider the case of portfolio company Cavium Networks.

Jarve says Cavium, which makes security processors for F5 and Cisco, among others, has attracted a number of suitors. One would-be buyer floated a $350m offer for the company. Instead, Cavium went public in May 2007. At its peak, it sported a market capitalization of nearly $1.5bn. Even in the midst of the current Wall Street meltdown, Cavium is still valued at $500m.

The Cavium tale sparked a round of (perhaps apocryphal) Silicon Valley chestnuts about companies that also passed on trade sales to remain independent: Cisco allegedly rejecting an $80m offer from 3Com and Google nixing a reported $1bn bid from Yahoo. One we can add to that list is Riverbed. Several sources have indicated that Cisco made a number of serious approaches to the WAN traffic accelerator, but was rebuffed. Riverbed, which at one point was valued at about $3.5bn, currently trades at a $740m market capitalization.

Hedge fund goes tender on Epicor

Brenon Daly

The largest shareholder of Epicor on Wednesday took its unsolicited bid directly to shareholders, just one day after the ERP vendor nixed the offer. Two weeks ago, hedge fund Elliott Associates offered $9.50 for each share of Epicor, giving the proposed transaction a $566m equity value and $814m enterprise value. (Elliott says the all-cash bid is not conditional on financing.) Epicor officially shot down the proposal, asked shareholders to wait for its board to review the proposal. The tender offer is set to expire in a month, but can be extended. Elliott, which began buying the stock in June, owns 10% of the equity, plus a slug of convertible notes. Epicor shares closed Wednesday up 4 cents at $6.84.

Unclipping Click Commerce

Brenon Daly

It turns out that software doesn’t really fit in a toolbox, after all. Illinois Tool Works, which reports third-quarter earnings Thursday, said recently that it plans to divest its Click Commerce division. (With the process just beginning, we don’t expect ITW to say much about the divestiture during tomorrow’s call.) The move would unwind ITW’s puzzling purchase two years ago of the supply chain management vendor. It paid $292m in cash for Click Commerce in September 2006.

ITW is a 96-year-old company that makes everything from commercial ovens to industrial packing tape to arc welders. It has inked more than 50 acquisitions during each of the past two years, spending about $1bn in 2007 and $1.7bn in 2006. And the company is on pace for a similar number of deals this year, having notched 26 buys in the first two quarters. Acquisitions are key for ITW, since the additional revenue picked up represents virtually the only growth at the company. In 2007, its core business expanded just 1.8%.

In announcing the divestiture, ITW indicated that Click Commerce had sales of $67m last year. (That was down slightly from the $74m the company posted in the four quarters prior to the acquisition.) And although ITW hasn’t broken out updated cash-flow figures for Click Commerce, the company has, historically, been a profitable operation. (In the two quarters leading up to the acquisition, Click Commerce had run at a solid 24% operating margin.) We suspect that any number of buyout firms – perhaps those that missed the sale of i2, another big supply chain management company – would be interested in taking a look at the book on Click Commerce.

Epicor: Thanks, but no thanks

Brenon Daly

Epicor has shot down an unsolicited offer from a hedge fund, confirming a move that the market had been expecting in the wake of the credit market collapse. The ERP vendor, which is being advised by UBS, told Elliott Associates that it wasn’t interested in the two-week-old bid of $9.50 for each share of Epicor. Although shares initially approached the $9 level on the news, the stock bottomed out at $6 last week. The gigantic spread reflects widespread doubt that Elliott and Epicor would strike a deal. With about 59 million shares outstanding, Elliott’s offer values Epicor’s equity at about $566m. In addition, Epicor holds $132m in cash and $380m in debt, giving the proposed deal an enterprise value of $814m. Elliott owns 12% of Epicor. We noted even before the credit bubble burst that Elliott might have a tough sell with Epicor.

HCM&A

-by Thomas Rasmussen, Brenon Daly

Rather than hitting the public markets, Authoria has landed in a private equity (PE) portfolio, where it is slated to serve as the initial plank in a rollup in the fragmented human capital management (HCM) market. PE shop Bedford Funding picked up Authoria last week, after checking out the market for about a year and a half. (The guys behind Bedford know a thing or two about market consolidation. Before hanging out a shingle with their $400m buyout fund, the Bedford directors and principals served as executives at ERP rollup Geac, which gobbled up dozens of companies before getting swallowed in a $1bn LBO.)

Its experience with ERP consolidation will likely come in handy for Bedford because we have noted a number of times that the current HCM market – with more than 50 startups, along with three or four large vendors – bears more than a few similarities to the ERP market earlier this decade. The ranks of ERP companies were thinned quite a bit as both strategic and financial acquirers went on shopping sprees. (Oracle, Microsoft and Lawson have all inked significant ERP acquisitions this decade, while PE-backed Infor and Consona got their ERP rollups started in 2002 and 2003, respectively.)

We suspect a similar wave of consolidation may be heading to the HCM market, which covers all the stages of hiring, from pre-employment screening to succession planning. And it’s not a bad time to be a buyer, since HCM valuations are coming down. (Authoria sold for about 1.3x its trailing sales, just half the level Vurv Technology got in its $128.8m sale to Taleo earlier this year. Granted, that’s only one data point, but we’ve heard from sources that the markdown of multiples is being seen across the sector.) Given that, along with Bedford’s stash of cash, we expect the rollup to get rolling very soon. What might it be looking for? Maybe a small vendor that could bolster Authoria’s offering around the early part of the hiring process, such as talent acquisition or screening.

Significant HCM deals since 2007

Date Acquirer Target Deal value Target revenue
September 29, 2008 Bedford Funding Authoria $63.1m $50m*
September 16, 2008 Standard Life Vebnet $43.4m $11.4m
June 9, 2008 US Investigations Services HireRight $195m $72m
May 6, 2008 Taleo Vurv Technology $128.8m $45m*
December 21, 2007 Kohlberg Kravis Roberts & Company Northgate Information Systems $1.2bn $897m
February 4, 2007 Infor Global Solutions Workbrain $197m $96.5m
March 23, 2007 Hellman & Friedman Kronos $1.8bn $599m

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

Banking deals

With the current credit crisis rocking the big banks, online consumer banking portal Bankrate has sidestepped most of the damage and even plans to do a bit of shopping. In the last month alone, it acquired banking blog Bankaholic and consumer credit resource portal Creditcardguide.com for $12.4m and $34m, respectively. That brought its total shopping tab over the past year to $150m on six acquisitions. (We would note that most of the companies that Bankrate picked up were existing partners.) The company recently told us that it will continue its acquisition spree, and it has the means to do so. Bankrate will have an estimated $35m in cash after its latest acquisitions, and has generated some $25m in cash flow over the past year. So who might the portal bank next?

Bankrate is decidedly a so-called ‘Web 1.0′ company. It lacks the customization and social networking features that many of its newer Web 2.0 competitors tout. This lack of new technology, along with a softening online advertising market, could land the portal in trouble. Bankrate could help shore itself up against those technology shortcomings by focusing its acquisition efforts on personal finance startups like Rudder and Mint.com. However, we don’t think it will do that. Instead, we expect Bankrate to focus strictly on the space that it knows, expanding partly by targeting its legacy competitors.

Given this, we think a likely target might be Creditcards.com, which is both a rival and a partner. Creditcards.com, majority owned by Austin Ventures since 2006, tapped Credit Suisse and Citigroup to bring it public in December, but the economic environment forced it to delay its offering in May. The company is profitable, with $60m in sales, but is laden with debt. Besides having very similar businesses, the two companies are hardly strangers. In fact, current Creditcards.com CEO Elisabeth DeMarse was the CEO of Bankrate prior to becoming Austin Ventures’ CEO-in-residence.

Given Creditcards.com’s likely valuation of several hundred million dollars, however, it is unlikely that Bankrate could afford the acquisition. (Bankrate currently sports a market capitalization of about $700m.) Instead, we suspect that Bankrate will continue to ink tuck-in acquisitions. We wouldn’t be surprised if smaller competitors like Credit.com or Credit-Land.com caught its eye.

Recent Bankrate acquisitions

Date Target Deal Value
September 23, 2008 Bankaholic $12.4m
September 11, 2008 LinkSpectrum (dba CreditCardGuide.com) $34m
February 5, 2008 InsureMe $65m
February 5, 2008 Lower Fees (dba Fee Disclosure) $2.9m
December 10, 2007 Nationwide Card Services $27.4m
December 10, 2007 Savingforcollege.com $2.3m

Source: The 451 M&A KnowledgeBase

Bygone buyouts

Brenon Daly

While overall tech spending on M&A has fallen about one-third so far this year, the once-bustling leveraged buyout (LBO) business has virtually disappeared. Just how much? It’s literally dimes instead of dollars. Buyout spending has plummeted from more than $100bn during the first three quarters of 2007 to just $12bn so far this year. That’s about the level of LBOs in 2004, before buyout shops were really looking at tech companies and before banks were comfortable lending for deals in the unproven and cyclical industry. (Of course, we have new problems in the credit market these days.)

Still, LBOs are getting done, despite the disappearance of debt and, in some cases, even the banks that were backing the buyouts. Earlier this week, for instance, Bedford Funding took home on-demand talent management vendor Authoria for $63m, the first of what we expect to be several deals by Bedford in the fragmented human capital management market.

Also, Nokia said earlier this week that it plans to sell its security appliance unit to an unnamed financial buyer. Several sources have indicated that one of the lead suitors for Nokia’s firewall and VPN business is Vector Capital. The San Francisco-based buyout shop already has experience with a security hardware company, having teamed with Francisco Partners to acquire WatchGuard Technologies, the maker of the Firebox UTM appliance for the midmarket, for $151m in July 2006.

PE deal flow

Period Deal volume Deal value
Q1-Q3 2004 38 $13bn
Q1-Q3 2005 42 $28bn
Q1-Q3 2006 67 $38bn
Q1-Q3 2007 102 $101bn
Q1-Q3 2008 67 $12bn

Source: The 451 M&A KnowledgeBase

Elliott elbows Epicor

Brenon Daly

Well, that didn’t take long. Just two days after we noted who won’t be bidding for Epicor, Elliott Associates tossed an offer of $9.50 per share for Epicor. The bid comes just two months after the hedge fund disclosed a large stake and began stirring for a sale of the old-line ERP vendor. With about 59m shares outstanding, Elliott’s offer values Epicor’s equity at about $566m. Additionally, Epicor holds $132m in cash and $380m in debt, giving the proposed deal an enterprise value of $814m. Epicor, which has seen substantial executive turnover this year, has struggled to record growth recently. However, the business has two attractive assets: a healthy maintenance revenue stream and solid cash-flow generation. Epicor shares closed Wednesday at $8.93, their highest level since mid-April.

Big buyers sit out Q3 uncertainty

Brenon Daly

With the third quarter in the books, we get our first glimpse of the impact that the unprecedented upheaval on Wall Street is having on tech M&A. Over the past three months, the value of tech deals dropped about one-third from year-ago levels, sinking from $58bn to $37bn.

The falloff was even more pronounced at the high end of the market: only six deals worth more than $1bn were announced during the July-September period, down from 11 deals worth more than $1bn during the same period last year and 22 deals worth more than $1bn during the third quarter of 2006. (Along those lines, IBM has acquired just one public company so far this year, down from three last year.)

There are a number of reasons for the muted deal flow, starting with the barren conditions in the credit market. That knocked the number of leveraged buyouts from 36 in the third quarter of last year to just 12 this year.

Strategic acquirers, too, faced their own difficulties in striking deals as they got clubbed on the Nasdaq. Consider Google, which saw its shares bottom out at the end of the quarter at a three-year low. So far this year, the online ad giant has inked just four deals, down from 14 during the same period last year. Or Citrix, which recently saw its shares reach their lowest level since mid-2005. The enterprise software company has scaled back its acquisitions, picking up a product line and a tiny German company so far this year, after closing five deals during the first three quarters of 2007. See full report.

Third-quarter deal flow

Period Deal volume Deal value
Q3 2005 811 $87bn
Q3 2006 1,030 $102bn
Q3 2007 822 $58bn
Q3 2008 691 $37bn

Source: The 451 M&A KnowledgeBase