Category: LBO

Micro Focus links with Attachmate in $1.18bn stock deal

Scott Denne

Contact:  Scott Denne

Micro Focus spends 40% of its stock to pick up Attachmate in order to expand its sales, but at the price of its profit margins. The combined company will have more than 3x the revenue of Micro Focus, but only a 25% jump in profits. Micro Focus finished its most recent fiscal year (ending in April) with $433m in revenue and $124m in income. For comparison, that’s 4x the income Attachmate generated on $957m in trailing revenue.

When you take a short-term look at the transaction, Micro Focus is giving up a lot (a 40% stake) for a small boost to its profits. When you look at the long-term benefits, however, it’s a much better deal. For one thing, part of Attachmate’s comparably lower profit margin comes from one-time restructuring costs. If you factor those out, Micro Focus is getting a 50% boost to profits and a tripling of revenue at a relatively cheap price.

While more restructuring and other one-time costs are likely to come as the companies integrate and look to squeeze more sales from Attachmate’s host of software assets, a year or two out from closing, the additional cash being generated by Attachmate could more than make up for the dilution – and help Micro Focus pay down the additional debt it’s taking on from Attachmate.

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Thoma Bravo gets better than face value from Compuware

Scott Denne

Contact: Scott Denne

At first glance, the $2.5bn take-private of Compuware looks like a fairly typical (though larger) Thoma Bravo deal – the private equity firm has bought many aging, but profitable, tech companies for multiples that are similar to this transaction. After stripping away the results for Covisint, the services business that it’s unloading as part of the deal, the terms look quite different.

The acquisition values Compuware at $10.92 per share, but that includes the 80% stake that Compuware holds in Covisint, a former subsidiary that Compuware took public last year, which will be distributed to Compuware shareholders ahead of the close. That per-share price gives Compuware a 3.1x trailing revenue valuation and 21.5x enterprise value to EBITDA multiple – both are on the high end of what Thoma usually pays.

Since Thoma isn’t actually paying for Covisint, stripping out that company’s financial performance and implied value makes Compuware a relative bargain. After backing out Covisint’s low revenue and high operating expenses, the EBITDA multiple drops to 12.3x, well below the median 17.4x for a Thoma Bravo take-private, not to mention the 22.3x it put up for Compuware rival Keynote Systems last year, according to the The 451 M&A KnowledgeBase.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

451 Research Tech M&A Outlook webinar

Brenon Daly

Contact: Brenon Daly

The momentum that drove tech M&A spending to a post-recession record level in 2013 is continuing to roll into this year. In just the first three weeks of January, we’ve already seen blockbuster transactions such as Google’s effort to reach inside your home with its $3.2bn purchase of Nest Labs; the largest-ever tech acquisition by a Chinese company (Lenovo’s pickup of IBM’s x86 server business); and VMware going mobile, inking the biggest deal in its history by paying $1.54bn for AirWatch.

But what does the rest of 2014 look like? What broad-market trends are likely to continue to impact deal flow this year? And what specific drivers are expected to shape M&A and IPOs in some of the key enterprise IT markets, such as SaaS, mobility and information security? Well, we’ll have a few answers for you as we look ahead in our annual Tech M&A Outlook webinar. The hour-long event is scheduled for Tuesday, January 28 at 1:00pm EST, and you can register here.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

The buyout bonanza

Brenon Daly

Contact: Brenon Daly

As corporate acquirers work through an increasingly fractured tech landscape, their financial rivals are finding a bonanza of opportunities there. In particular, private equity (PE) firms got busy picking up castoff businesses and unloved companies in a spree of multibillion-dollar transactions in 2013. That sent spending by PE firms in 2013 to a post-recession record, both for the absolute amount spent as well as the proportion of PE dollars in overall spending on acquisitions. Fully one out of every four dollars handed out in tech M&A consideration came from buyout shops – nearly twice the level of any post-recession year.

The record in 2013 was driven by mammoth deals that haven’t been seen since prelapsarian days. Three of the 10 largest transactions in the entire tech sector last year involved PE shops. More broadly, cash-rich buyout firms showed they were ready once again to do big deals, targeting overlooked and out-of-favor public companies or huge units at tech giants that are shedding businesses as they seek elusive growth. There were plenty of big-ticket examples of both of these types of transactions in PE deal flow last year.

In terms of take-privates, Dell obviously topped the list. (Though the MBO stands as the largest PE deal since 2007, we would note that the transaction accounted for less than half of last year’s total PE spending. Even excluding the Dell MBO, spending on buyouts handily topped each of the annual totals since 2008.) Yet, three other LBOs also topped $1bn last year. Add to that, there were massive carve-outs and divestitures that boosted spending totals, including Qualcomm selling its Omnitracs unit to Vista Equity Partners and Intuit punting its financial services unit to Thoma Bravo, among other transactions.

PE activity

Year Deal volume Deal value Percentage of overall tech M&A spending
2013 184 $61bn 25%
2012 161 $25bn 14%
2011 204 $29bn 13%
2010 143 $27bn 14%
2009 103 $13bn 9%
2008 107 $17bn 6%
2007 150 $103bn 24%

Source: The 451 M&A KnowledgeBase

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Time is money

Ben Kolada

Contact: Ben Kolada

Novacap Technologies is selling Canadian hosting portfolio company iWeb Group to Internap Network Services for $145m, representing a quick – and solid – return for the Canadian private equity firm. Just two years ago, it took iWeb private for $69.6m (including the assumption of net debt).

Under Novacap, iWeb grew total revenue 50% while maintaining basically the same operating profit margin (only adjusted EBITDA was disclosed in iWeb’s sale to Internap). It also now serves 10,000 SMB customers in more than 100 countries. Though Novocap’s total ROI isn’t immediately clear, the firm undoubtedly did well on its two-year holding. Jefferies advised Internap, while Bank Street Group worked the sell-side.

On the flip side, for Internap, this deal highlights the interplay between two of the most important elements of any transaction: time and money. In this case, waiting longer to buy iWeb meant Internap ended up paying more for it, both on an absolute and relative basis. And Internap will end up paying for it longer: the company is taking on new debt to cover some of the cost of iWeb, which is twice as high as it was the last time the company was on the block.

iWeb’s rising valuation

Metric Sale to Novacap* Sale to Internap
Deal value $69.6m $145m
Price/sales 2.3x 3.3x
Price/EBITDA 9.3x 13.2x**

Source: The 451 M&A KnowledgeBase *Using enterprise value **Using adjusted EBITDA

Are the go-go days for tech M&A go-go-gone?

Brenon Daly

Contact: Brenon Daly

Twice a year, 451 Research and Morrison & Foerster survey many of the top tech dealmakers to get their views on the M&A market, both on current activity levels and valuation trends, as well as forecasts. (See our full report on our recent M&A Leaders’ Survey.) In this go-round, we decided to extend the outlook with a rather provocative question: will we ever see another boom time in tech M&A?

Specifically, we asked respondents to look ahead for the next half-decade and give us their best guess as to whether tech M&A spending would ever regain the levels of 2006 and 2007, years in which buyers handed over a total M&A consideration of about $450bn. (Yes, almost a half-trillion dollars worth of deals were announced in both those years.) Hitting that level would effectively mean doubling the total amount spent on tech deals around the world in each year since the end of the recession.

The answer? Roughly 40% of respondents said it would probably happen, while 30% said it probably won’t happen. The remaining 30% said it was ’50-50′ whether spending would get back to prerecession boom levels any time before 2018. (Again, for more on this question, as well as the outlook for M&A activity and valuations in 2014, see our full report.)

What is the likelihood that M&A spending will recover to prerecession levels?

Response Percent
Absolutely will not recover 2%
Probably will not recover 27%
50/50 chance will recover 31%
Probably will recover 35%
Absolutely will recover 5%

Source: M&A Leaders’ Survey from 451 Research / Morrison & Foerster

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PE shops taking home tech companies that are old and in the way on Wall Street

Brenon Daly

Contact: Brenon Daly

More and more, the portfolios of private equity (PE) firms are looking like retirement homes for the ever-maturing tech industry. Consider Marlin Equity Partners’ proposed $891m take-private of Tellabs, announced this morning. The company has been hawking its networking equipment gear since 1975, and has seen its share of ups and down over the past four decades in business. Tellabs currently finds itself in one of those protracted ‘downs,’ having shrunk for three straight years. The leveraged buyout (LBO) reflects that, with Marlin valuing Tellabs, net of its substantial cash holding, at just 0.4x trailing sales.

By our count, the Tellabs take-private is the ninth tech LBO valued at more than $300m announced so far this year. (To be clear, that’s equity value for a full business, and excludes any pickups of businesses divested by public companies.) On average, the companies that have been erased recently from the public market by PE firms were founded in 1990. The ‘youngest’ company was founded in 1998, exactly the same year Google incorporated itself.

Looking more closely at the list of this year’s 10 take-privates, we would note that only one company actually managed to get an above-market valuation. (That would be Vista Equity Partners’ $644m acquisition of Greenway Medical Technologies, which went off at 4.7x trailing sales.) Four other companies said goodbye to Wall Street at 1x sales or lower. On average, the significant LBOs of 2013 have gotten done at a median valuation of 2.1x trailing sales, a full turn lower than the broad market multiple for the 50-largest transactions of 3x trailing sales.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

A round trip for Active Network shares

Ben Kolada

Contact: Ben Kolada

After a little more than two years of trading on the NYSE, registration and events management software vendor Active Network is leaving the public eye in a $1bn take-private by Vista Equity Partners. The deal carries a fairly paltry valuation, and only returns the company’s share price to basically the same level where it sold them in the IPO. And that was when Active Network’s revenue was roughly one-quarter smaller than it is today.

Vista is paying $14.50 per share in cash for Active Network, valuing the company’s equity at $1.05bn. Including the assumption of cash and capital lease obligations, the deal values Active Network at 2.1x trailing sales. For comparison, the company’s much smaller competitor Cvent is currently valued much higher at $1.4bn, or 14.5x trailing revenue. Citi Capital Markets advised Active Network, while Bank of America Merrill Lynch advised Vista Equity Partners.

We’d argue that the subpar valuation is the combination of meager growth and an inability to meet financial expectations. Wall Street expects Active Network to grow revenue 8.5% this year, to about $455m. Although that’s from a much larger base, it’s still a fraction of the 30% growth analysts expect Cvent to record. Further, financial expectations for Active Network are far from certain, given that the company has repeatedly issued results below its own estimates.

In a roundabout way of acknowledging the company’s public troubles, Vista took a charitable view of the per-share premium, noting that its offer is 111% above the average year-to-date closing price for Active Network. A more grounded view, however, shows the offer only matches Active Network’s $15 IPO price in May 2011, and represents a more common 27% premium to its closing share price Friday.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

A big seller, BMC is back as a small buyer

Brenon Daly

Contact: Brenon Daly

As the mammoth $6.9bn take-private of BMC Software nears its close, the IT systems management giant has finally turned from seller to buyer. After almost a year out of the M&A market as it was hammering out the deal with its private equity (PE) backers, BMC has returned as an acquirer, with two small purchases in the past week. (The pending LBO, which stands as the second-largest PE deal since the end of the recent recession, is still tracking to a close either this month or next.)

BMC was previously in the market last September, but now has reportedly acquired a small social collaboration startup in India and formally announced the pickup of Vancouver-based Partnerpedia. In the four years leading up to the take-private, BMC averaged about four acquisitions annually.

Of the two August deals, the addition of the roughly 70-person Partnerpedia is the more significant transaction. As my colleague Chris Hazelton described the pairing: By purchasing Partnerpedia, BMC is able to provide a centralized app store for most major computing platforms – desktop, cloud and mobile. See our full report.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

For tech M&A in July, big deals but little else

Brenon Daly

by Brenon Daly

Summer is a time for blockbusters – both for Hollywood and, apparently, on Wall Street. In the just-completed month of July, tech acquirers announced seven deals valued at more than $1bn. That’s twice as many 10-digit transactions as typically get announced each month.

The mega-deals helped push last month’s overall spending on tech M&A to its highest level for the mid-summer month in seven years. The aggregate value for IT, telco and digital media transactions announced around the world in the just-completed month totaled $23.7bn, slightly above the total for July 2012 but nearly twice the monthly spending level we tallied during the recession.

Among the significant acquisitions announced last month: Schneider Electric’s $5bn consolidation of Invensys, Cisco Systems’ $2.7bn reach for network security vendor Sourcefire (the third-largest information security transaction) and AT&T’s $1.2bn play in the prepaid wireless segment with Leap Wireless. (Including the debt and cash carried by Leap, which is better known under its Cricket brand, AT&T is actually paying closer to $4bn.)

While there was an unusual amount of activity at the top end of the M&A market in July, deal flow dried up dramatically elsewhere. We tallied just 240 transactions in July – a decline of about one-quarter from the same month in the two previous years. In fact, we have to go back almost two years (November 2011) to find a month with as low a total number of deals as July 2013.

The light activity in July actually accelerated the already pronounced decline that we’ve registered in tech M&A. So far this year, tech buyers have done just shy of 1,800 transactions, a 20% falloff in activity compared with the roughly 2,200 deals announced during the comparable period in both 2012 and 2011. Another way to look at it: The number of transactions announced in 2013 almost exactly matches the comparable number from 2009, while this year’s spending is twice as high as the recession year.

Global tech M&A

Month Deal volume Deal value
July 2013 240 $23.7bn
July 2012 341 $21.8bn
July 2011 328 $13.9bn
July 2010 268 $15bn
July 2009 277 $8.6bn

Source: The 451 M&A KnowledgeBase