In a sign of how rocky the credit market has become, JDA Software Group took the highly unusual step Tuesday afternoon of issuing a press release to confirm that it has the financing to pull off its planned $461m acquisition of supply chain management vendor i2 Technologies. Among other moves, JDA added Wells Fargo to the loan syndicate. According to terms of the early August deal, JDA was planning to borrow up to $450m from Credit Suisse and Wachovia. As Wachovia reeled due to its own risky loan portfolio, market participants began questioning Wachovia’s ability to help finance JDA’s purchase. That uncertainty knocked i2 shares, which were trading near JDA’s bid of $14.86 earlier this month, to as low as $11.50 on Wednesday. The stock snapped back after JDA’s release hit the wire, rebounding to about $13.50 on Tuesday afternoon. (As an aside, we wonder how many arbs got crushed in that swing.) i2 shareholders are slated to vote on JDA proposed deal on Nov. 6.
Category: LBO
Who’s not shopping for Epicor
In virtually any other credit market, we’d be tempted to hold out old-line ERP vendor Epicor Software as an exemplary buyout candidate. The company will do about $530m in revenue this year, with $200m of that coming in the easily bankable form of software maintenance fees. (And the company is hardly expensive, with an enterprise value that’s just 3.7x this year’s maintenance revenue.) Moreover, it’ll throw off some $65m in cash flow in 2008 to help cover a hypothetical leveraged buyout.
But as we said, these are not normal days for debt. So in our report last week on an activist hedge fund pushing the company to pursue ‘strategic alternatives,’ we focused on the strategic buyers that might be interested in – and could afford – Epicor. They are, in order of likelihood: Microsoft, Oracle and SAP. Truth be told, though, none of those acquirers seems likely. And while we’re scratching potential suitors for Epicor, we can go ahead and erase M2 Technology Partners.
The buyout firm, which launched in mid-June with backing from Accel-KKR, is headed by Mark Duffell and Michael Piraino, who served as Epicor’s COO and CFO, respectively, until earlier this year. We understand that M2 is exploring other opportunities in the business applications market, and may well have its inaugural investment signed, sealed and delivered by the end of the year. It won’t be Duffell and Piraino’s old shop Epicor, but just think how much time they’d save on due diligence if it were.
Significant ERP deals
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Source: The 451 M&A KnowledgeBase
Standstill around the lamp
After a few months of pointed exchanges, Aladdin Knowledge Systems and its would-be buyer, Vector Capital, have agreed to a standstill in an attempt to negotiation a deal. Vector, the encryption vendor’s largest shareholder, had been pushing for a shareholder vote on Oct. 23 on its plan to replace three of Aladdin’s five board members. The buyout firm has set aside that demand, as well as agreeing not to unload any of its 14% holding. For its part, Aladdin agreed to sign a confidentiality agreement with Vector, and will not to seek another buyer for part or all of its business. Last month, Vector offered $13 for each share of Aladdin; the stock currently trades above that. The standstill gives the two sides at least a month to work out a deal, as Vector can’t call for another shareholder meeting until Oct. 30 at the earliest.
Preferred gets preference
Even with McAfee’s offer of $5.75 in cash for each share of Secure Computing representing a premium of about 27% over the previous close, many Secure shareholders are underwater. In June, Secure sank to its lowest level in six years, part of a slide that has seen some 40% of its market value erased this year. The decline left the company trading at just 1x revenue. (When it shed its authentication business at the end of July, we noted that the divested unit sold for twice the valuation of the remaining Secure business, a highly unusual situation in corporate castoffs. We also asked if the move wasn’t a prelude to an outright sale of the company.)
It turns out, however, that the stock’s decline didn’t really affect Secure’s largest shareholder, Warburg Pincus. The private equity firm took a $70m stake in Secure in January 2006. (Secure took the money to help it pay for its mid-2005 purchase of CyberGuard.) Yet, because of the way Warburg structured its purchase, the shop ended up making money on its holding. That’s true even though Secure stock, even with McAfee’s offer, is some 60% below where it was when Warburg took its stake. (Shares changed hands at $14.40 each when Warburg picked up its holding, although the conversion price was adjusted slightly six months later to offset the potential dilution caused by Secure’s cash-and-stock purchase of CipherTrust.)
In the end, Warburg pocketed $84m from McAfee for its Secure holdings, which were largely made up of series A preferred shares. Having put $70m into Secure, and then seen the shares sink, we guess Warburg is probably content to book even a slight gain on its investment.
Battle set for Aladdin’s lamp
In contrast to the LBO of data encryption vendor SafeNet a year-and-a-half ago, Vector Capital’s latest effort to take an IT security company private has been a more contentious process. After a series of public and private exchanges with Aladdin Knowledge Systems, Vector, through a subsidiary, called for a special meeting of shareholders to vote on the buyout firm’s plan to replace three of the company’s five board members. On Thursday, Aladdin agreed to the vote, setting October 23 as the date for the proxy showdown.
Vector is currently Aladdin’s largest shareholder, with a 14% stake (Aladdin insiders hold about 20%). The buyout firm began picking up shares earlier this summer at about $9 per share. It quickly piled up a 9% stake, and has since bumped it up to 14%. Along the way, we understand it made numerous private offers to buy the company and then disclosed in late August a public offer to buy the rest of the company at $13 per share. While Vector’s offer represented a 40-50% premium from when the firm started buying, Aladdin shares have ticked above the offer, changing hands at $13.80 in mid-Friday trading.
The unsolicited bid from Vector didn’t go over well with Aladdin. The company has dismissed it as ‘opportunistic’ but hasn’t said much more than that. Behind the scenes, Aladdin has carped that the only party that stands to gain from Vector’s bid is Vector, either by picking up Aladdin on the cheap or disrupting Aladdin’s business enough that it would benefit rival SafeNet, a Vector portfolio company. Investors, who have seen Aladdin shares shed as much as two-thirds of their value since last October, may not be so dismissive of the floor price set by Vector. (They are also mindful of what might happen to their holdings if Vector stymied in its efforts to ink a deal gets rid of its 14% stake of Aladdin. Look out below.)
In the month remaining before the vote, we suspect the jabbing and jockeying between Aladdin and Vector will increase. Israel-based Aladdin recently retained the PR firm Joele Frank, Wilkinson Brimmer Katcher, which is basically the go-to shop for companies caught in a bear hug, to get its side of the story out. But the company, along with all of its flaks, faces an experienced bidder. Not only has Vector pushed through unsolicited bids in the past, one of the partners working on the firm’s efforts, David Fishman, has worked on the other side of the table. Before joining Vector, Fishman was a banker at Goldman Sachs, where he worked on a number of defensive deals, including PeopleSoft’s attempted stiff-arm of Oracle. We’re pretty confident that no one involved in this transaction wants to repeat the nastiness of Oracle’s hostile run at PeopleSoft.
Vector’s velocity
With all the bidding and buying, it’s hard to keep straight what’s going on with Vector Capital. Already this year, the tech buyout shop has made several offers for down-and-out companies. It even got one through last week, as portfolio company Tripos announced a $57m purchase of drug development software maker Pharsight. The deal is expected to close by year-end.
However, Vector’s other recent M&A moves, most of them coming as unsolicited offers, haven’t been as straight-forward. It made an on-again, off-again run this summer at Corel, a half-decade after taking it private and two years after spinning it back onto the public market. (We would note that Corel shares have never traded as high as they did at the IPO in spring 2006.) Vector also bid for troubled content management vendor Captaris, but lost out to the acquisition-hungry Open Text. The $131m deal is expected to close before year-end, and Captaris shares are trading as if the transaction will go through.
In addition to those mixed efforts, Vector has made an unusual two-pronged approach at Israeli security company Aladdin Knowledge Systems. First, it offered to buy Aladdin outright, offering $13 for each share it doesn’t already own. (Vector is Aladdin’s largest shareholder, holding some 14% of the company.) Then, Vector offered to pick up just Aladdin’s digital rights management (DRM) business. The DRM business is the most-attractive unit at Aladdin, and would fit nicely with SafeNet, which Vector took private last year. Perhaps not surprisingly, Aladdin has said ‘thanks, but no thanks’ to both unsolicited options, and has retained Credit Suisse to advise it.
Selected Vector transactions
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Source: The 451 M&A KnowledgeBase
Hiring bankers
Once thought to be just part of the broader ERP offering, the so-called human capital management (HCM) market has come into its own in recent years. That has meant a few IPOs (going back to when there was a market for the offerings) as well as two or three HCM deals each year worth more than $100m. Recently, those twin threads came together in HireRight. The $195m acquisition of that company, which sells pre-employment screening software, closed earlier this month, almost exactly a year after the company went public.
In addition to the acquisition of HireRight by a private company serving the US government, we also noted one of the largest deals for market consolidation earlier this summer when Taleo spent $129m for longtime recruiting software rival Vurv Technology. (As opposed to consolidation, earlier HCM deals were typically done as a way for the acquirer to get into new markets or expand its product portfolio, such as outsourcing giant ADP spending an estimated $160m two years ago for Employease, an on-demand HCM vendor focused on the midmarket.)
So what does HCM deal flow look like for the rest of the year? Salary.com, which picked up a small British firm on Tuesday, has indicated that it plans to ink another deal or two before the year is out. Salary.com went public last year and has done two deals since then, including this week’s $5m purchase of InfoBasis.
More intriguing, however, is the rumor we heard from two market sources that PreVisor, a PE-backed HCM vendor selling employee screening and testing software, is looking to sell. The company was formed in August 2005 through the combination of three companies, and it has done a handful of acquisitions since then. There is no initial word on who might be bidding on PreVisor, which is owned by Veronis Suhler Stevenson.
HCM deal flow
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Source: The 451 M&A KnowledgeBase
Corporate castoffs
Look who’s hitting the corporate garage sales these days – other corporations. While divestitures used to go most often straight to private equity shops, more than a few castoff businesses are now finding homes inside new companies. The latest example: AMD’s sale of its digital TV chip division Monday to Broadcom for $193m.
Given AMD’s struggles, as well as the fact that rival Intel has shed a number of businesses in recent years, the divestiture wasn’t a surprise. In fact, my colleague Greg Quick noted two weeks ago that AMD was likely to dump its TV chip business, naming Broadcom as one of the likely acquirers.
On the buy side, Broadcom joins fellow publicly traded companies Overland Storage, L-1 Identity Solutions and Software AG, among others, that picked up properties from other listed companies this year. That’s not to say that buyout firms have been knocked out of the market, despite the tight credit conditions. PE shops Vector Capital, Thoma Cressey Bravo and Battery Ventures have all taken businesses off the books of publicly traded companies in 2008.
Still, the activity by the corporate shoppers is noteworthy. And the list is likely to grow as more companies look to clean up their operations during the lingering bear market. The next name we may well add to the list is Rackable Systems, which said earlier this month that it is looking to shed its RapidScale business. (The divestiture would effectively unwind its acquisition two years ago of Terrascale Technologies, and comes after a gadfly investor buzzed Rackable for much of the year.)
As to who might be eyeing the assets, we doubt there are many hardware vendors interested in RapidScale, because they have either made acquisitions (Sun’s purchase of Cluster File Systems, for instance) or have partnerships (both EMC and Dell partner with Ibrix). However, a service provider could use the technology to enhance its storage-as-a-service offering. In a similar move, we’ve seen telecom giants like BT and Verizon pick up security vendors to offer that as a service. And finally, we’d throw out a dark horse: Amazon, which is one of Rackable’s largest customers, could use RapidScale’s clustered storage technology to bolster its S3 offering.
Half-billion-dollar communications division up for grabs
Newly appointed interim VeriSign CEO Jim Bidzos is picking up where former CEO Bill Roper left off. In a recent conference call, Bidzos (who founded the company) reiterated VeriSign’s plan to shed many of the businesses picked up by the company’s longtime chief executive, Stratton Sclavos. (The acquisition-frenzied CEO inked more than a half-dozen deals in both 2005 and 2006, in addition to several headline-grabbing purchases at the height of the Internet bubble.) We believe VeriSign’s next divestiture is imminent, with the sale of its Communications Services division likely to go through shortly.
We have speculated on this in the past, but some recent developments suggest that a sale is close at hand. VeriSign placed the division in discontinued operations a few months ago, according to recent SEC filings. The unit, which provides communications services such as connectivity, interoperability and mobile commerce, is the largest and most profitable of the company’s non-core business segments. It pulled in $568m for the previous year, ending June 30. That’s down from $579m for calendar year 2007 and $804m in 2006. The decline is mostly related to VeriSign’s divestiture of Jamba, since sales in the rest of the division have been flat. That stagnation stands in contrast to VeriSign’s core business, the Internet Infrastructure and Identity Services division, which increased revenue 20% in the most recent quarter.
As to who might be interested in VeriSign’s Communications Services division, we have learned that there is at least one strategic buyer at the table. In fact, a deal was supposed to be signed, sealed and revealed with the company’s second-quarter earnings. But the transaction was delayed when the potential acquirer took a closer look due to the continued softness in the economy. We expect the divestiture to close soon. The most obvious strategic buyer of the unit is a big telecom shop – namely, Verizon or AT&T. Private equity has also expressed interest in the unit. But since the mystery bidder is said to be strategic, we believe a telco will likely end up as the new owner of VeriSign’s Communications Services unit for a price in the neighborhood of $1bn.
VeriSign’s communications acquisition binge
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Source: The 451 M&A KnowledgeBase
Sizing up Secure Computing
In many ways, Secure Computing’s divestiture of its authentication business to Aladdin Knowledge Systems raises more questions than it answers. Secure’s rationale for the sale is pretty simple: pay down some debt and get out of a sideline business that’s dominated by RSA and has a solid number two in Vasco Data Security. (For the record, Vasco is about four times the size of Secure’s SafeWord business and runs at a highly respected 25% operating margin.)
So it’s pretty clear why Secure was a willing seller (in fact, we hear that Secure had been a willing seller of the business for more than a year). Less clear is why Aladdin was a willing buyer of the property at a relatively rich price of 2x sales, no less. Aladdin investors chose not to stick around for the company’s explanation of why it was willing to shell out two-thirds of its cash holdings for a product line in a cutthroat market. They fled the stock, trimming 14% off the price and sending Vasco to its lowest level since January 2004.
Of course, Secure has had an even rougher run of it on the market recently, as the company has come up short of Wall Street estimates for the past two quarters. Shares of Secure currently change hands lower than they have at any point during the past half-decade. Since the beginning of the year, the stock has shed 60%, a decline that recently cost longtime CEO James McNulty his job.
The long, uninterrupted slide in Secure’s valuation raises an even larger question about the divestiture: Was the sale of SafeWord just a prelude to an outright sale of the company itself? The numbers certainly don’t work against a deal. In fact, Secure is currently valued at basically 1x sales just half the level it got for the divested property. (Usually, it’s the reverse, with corporate cast-offs getting sold at less than half the overall company’s valuation.)
Any planned acquisition, however, would probably have to go through Warburg Pincus, which holds the equivalent of about 7% of Secure’s common stock, going back to a financing deal it struck to help Secure buy CipherTrust in July 2006 for $264m. Warburg invested $70m at a time when Secure stock was trading at about 3x higher than it is now. With Warburg that far underwater on its holding, we can only imagine the pointed questions the private equity firm will ask Secure.