Category: LBO

Will TeleNav be a buyer or a seller?

Ben Kolada

Contact: Ben Kolada

TeleNav’s revenue is expected to decline significantly in 2013, but the company is making attempts to expand into growth markets, as evidenced by its recent acquisition of local mobile advertising startup ThinkNear. With its shares continuously battered on the public market, could TeleNav spurn public scrutiny and seek a private equity buyer? Its mountain of cash could enable the company to go in either direction – buyer or seller.

TeleNav stumbled onto the Nasdaq in May 2010. After repeatedly issuing guidance below analysts’ estimates, the company’s shares are currently trading nearly one-third below their IPO price. Revenue for its fiscal 2013, which ends in June, is expected to decline 13% to $190m. The company’s revenue primarily comes from providing GPS navigation software to wireless carriers, though it also serves the automotive vertical and enterprises, and recently began targeting the local advertising market.

Although TeleNav is rarely an acquirer, its $22.5m ThinkNear pickup could be the beginning of a buying spree meant to propel growth in its local mobile advertising business. The mobile advertising market is in hyper-growth mode, and TeleNav has an audience of 34 million users accessing its services that it hasn’t yet materially targeted for advertising purposes.

Meanwhile, the debt-free company is sitting on nearly $200m of cash and short-term investments that it could use to fuel its M&A machine and inorganically grow this business segment, which represents less than 10% of its fiscal 2012 revenue.

Conversely, though, TeleNav’s treasury could attract buyout bidders. Its market value is currently about $260m, but its cash and short-term investments reduce its enterprise value to just about $60m. A lofty 30% per-share premium would give the company an enterprise value of less than half projected fiscal 2013 revenue. However, we expect that if the company is taken private, its newfound parent would continue to invest in its mobile advertising business because of that market’s growth potential. TeleNav reports fiscal 2013 first-quarter results after the bell tomorrow.

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

Though relatively small, Thoma Bravo’s Mediware buy signals larger trends

Ben Kolada

Contact: Ben Kolada

Although Thoma Bravo’s $195m reach for Mediware Information Systems isn’t exactly a market-moving acquisition, tech dealmakers will note that the transaction underscores a pair of larger trends in tech M&A. The deal continues the consolidation in the medical-focused IT vertical, as well as hints at the reemergence of buyout shops as volume acquirers.

Thoma Bravo is handing over $22 in cash for each share of Mediware’s stock, a 40% premium to the day-prior closing price, and the highest price Mediware’s shares have ever seen. The transaction values Mediware’s equity at $195m. However, the medical management software vendor’s $40m in cash holdings, and no debt, reduces its net cost to $155m. Using that enterprise value figure, Mediware is valued at 2.4 times trailing revenue and 8.8x trailing EBITDA.

Mediware’s sale is the latest acquisition in the rapidly consolidating medical-focused IT vertical. In July, Huntsman Gay Global Capital sold Sunquest Information Systems to Roper Industries for $1.4bn, or about 10x projected EBITDA, and One Equity Partners acquired M*Modal for an enterprise value of $1.1bn, or 2.4x trailing sales. We’ve recently noted that medical speech recognition and transcription companies in particular seem to be receiving considerable buyout interest.

While the Mediware acquisition shows the health of medical-focused tech M&A, it also points at somewhat of a reemergence of private equity firms as volume acquirers. Thoma Bravo, including its portfolio companies LANDesk and PLATO Learning, has already announced five acquisitions this year. PE firms were also especially active in August, with Carlyle Group shelling out $3.3bn for Getty Images.

PE activity also comes while some strategics are sitting on the sidelines. For instance, CA Technologies, which has historically announced about four acquisitions per year, has only announced one this year – the purchase of process automation software veteran Paragon Global Technology. The deal, announced this week, is CA’s first disclosed transaction in more than a year. Also, Symantec has been out of the market since March.

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

General Dynamics nabs networking cybersecurity vendor Fidelis

Ben Kolada

Contact: Ben Kolada

General Dynamics on Monday announced the acquisition of network security vendor Fidelis Security Systems. Fidelis’ customer profile and proximity to security operations at federal agencies appealed to General Dynamics as the defense giant looks to expand its cybersecurity capabilities against several competitors that have already announced inorganic moves in this market.

General Dynamics isn’t disclosing terms of the all-cash deal, but did say that Fidelis has approximately 70 employees. When we last wrote about Fidelis in February 2011, we noted that it had 52 employees and that its average deal size had steadily grown from $200,000 in 2008 to $350,000. At the time, the company had 62 customers (up from 21 in 2008).

We’ve written before about traditional military contractors moving toward cybersecurity as the government cuts back on traditional military spending. In June, Northrop Grumman printed a similar transaction, reaching for Australian network security systems integrator M5 Network Security. And in October 2011, ManTech International announced that it was acquiring network, security and systems integration and software development vendor Worldwide Information Network Systems for $90m. General Dynamics also bought Fortress Technologies, which provides wireless mesh network access points and software that enable US defense agencies to establish secure wireless LAN connections, in July 2011. We’ll have a full report on this deal in an upcoming Daily 451.

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

Tech M&A slump continues in April

Brenon Daly

Contact: Brenon Daly

The deal drought continued into April, with spending on tech transactions around the globe during the just-completed month coming in at only $12bn. That’s less than half the level of spending on tech M&A that we recorded in April during the same month last year.

Spending on deals this year has now dropped in three of the four months, compared with 2011. (The $12bn of spending in April essentially matched the monthly average of the previous three months so far this year.) Additionally, the number of acquisitions in April slumped to its lowest level this year.

The low spending and light volume goes against what most observers projected for 2012. Many buyers – flush with cash and enjoying their highest stock price in a decade or so – indicated that they would be active in the M&A market after many deals got knocked off the table due to the European debt crisis in the back half of 2011.

But now, it seems like pricing is the problem. In the recent M&A Leaders’ Survey from 451 Research / Morrison & Foerster, two-thirds of respondents said rich valuation expectations at target companies were keeping deals from getting closed. Only 10% of the survey respondents said pricing wasn’t a hindrance in closing deals. (See the full report.)

In terms of the acquisitions that did get announced last month, we couldn’t help but notice the stark contrast between the two targets of the largest (non-patent) deals in April.

On the one hand, we saw Vodafone Group’s $1.7bn purchase of Cable & Wireless Worldwide, a company that traces its roots back to the 1850s, generates nearly $3.5bn of sales and has 6,000 employees. And on the other hand, there was Instagram – a company with no revenue, only a dozen employees and a 2010 vintage that nonetheless fetched $1bn in its sale to Facebook.

2012 activity, month by month

Month Deal volume Deal value % change in spending vs. same month, 2011
January 340 $4.1bn Down 65%
February 272 $11.1bn Up 16%
March 289 $19.9bn Down 30%
April 267 $12.3bn Down 55%

Source: The 451 M&A KnowledgeBase

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

M&A spending slump to start 2012

Brenon Daly

Contact: Brenon Daly

With Q1 set to wrap on Friday, M&A spending is on track for its lowest quarterly level in two years. The aggregate value of all tech transactions announced around the globe in the first three months of 2012 slipped to just $31bn, lower than both the previous quarter (Q4 2011) and the same quarter last year (Q1 2011).

The declining M&A activity comes as the overall economic environment has improved dramatically from 2011. For instance, there haven’t been emergency bailouts or historic downgrades of sovereign debt so far this year. Even Europe, which was the epicenter for much of the recent economic woes, is back growing again after actually contracting in the fourth quarter.

Reflecting that renewed optimism, the Nasdaq index has poked above 3,000 for first time since late 2000. During the quarter, the index recorded an almost uninterrupted ascent, gaining an astounding 19% since the start of the year. On top of the ever-increasing share price, most tech companies are continuing to stuff cash into their treasuries at a record rate.

So there are plenty of resources – in the form of both market confidence and acquisition currency – to do transactions. And yet few companies are shopping, at least not for significant purchases. In Q1, we recorded just eight transactions valued at $1bn or more – compared with an average of 12 big-ticket deals announced in each quarter last year.

Recent quarterly deal flow

Period Deal volume Deal value
Q1 2012 882 $31bn
Q4 2011 874 $38bn
Q3 2011 955 $63bn
Q2 2011 952 $71bn
Q1 2011 914 $47bn

Source: The 451 M&A KnowledgeBase

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Acquisitions drive EnerNOC

Contact: Brenon Daly, Thejeswi Venkatesh

EnerNOC and Comverge both went public in 2007, barely a month apart from each other. Since then, however, the paths of the two energy demand response vendors have diverged dramatically. EnerNOC’s revenue has more than quadrupled from $61m in 2007 to $287m in 2011. Meanwhile, Comverge has plodded along, growing at less than half the rate of its rival. But the real problem with the company wasn’t its top line, but rather its liquidity position: Comverge was on the verge of breaching its debt covenants.

It was that shaky financial position that helped to push Comverge into a capitulation sale to H.I.G. Capital earlier this week. The buyout firm is paying just $49m, or $1.75 for each share. (That basically equals the trading price for Comverge over the past week but is a far cry from when the stock changed hands above $30 back in 2007.) H.I.G.’s offer values Comverge at a measly 0.4 times trailing sales. That’s about half the valuation that EnerNOC currently garners, and that’s after shares of the company have lost nearly two-thirds of their value over the past year or so.

So how did the rival firms end up in such different places after starting from a similar spot? Part of the answer may have to do with the M&A activity from each of the players. EnerNOC has spent more than $60m on four acquisitions over the past three years, while Comverge shied away from rolling the dice on M&A.

Select EnerNOC deals

Date Announced Target Deal value Focus
July 6, 2011 Energy Response $30.1m Demand-side response aggregation
January 26, 2011 M2M Communications $28.6m Wireless sensors for remote monitoring
March 24, 2010 SmallFoot $1.4m Demand control software

Source: The 451 M&A KnowledgeBase

Who will shop during Quest’s ‘go shop’?

Brenon Daly

Contact: Brenon Daly

After more than two decades as a public company, Quest Software said Friday that it was planning to go private in a $2bn management buyout (MBO) with participation from Insight Venture Partners. The deal isn’t unexpected, as the old-line software vendor has a financial profile that (arguably) is more at home in a private equity (PE) portfolio than on the Nasdaq: a company that grows at a modest 10% clip (led by its services business), does a handful of acquisitions every year, and is headed by a CEO who owns about one-third of the equity.

Under terms, the MBO group will offer $23 for each of the remaining shares not currently held by chief executive Vinny Smith. (As is standard in these transactions, Smith will roll over his equity into the newly owned entity once the deal closes.) Quest has about 90 million shares outstanding, so the equity value of the proposed transaction is roughly $2bn. On a net basis, the company carries about $200m in cash, giving Quest an enterprise value of roughly $1.8bn.

That means the MBO group is offering 2.1 times Quest’s 2011 revenue of $857m and 1.9x its forecasted revenue of about $940m in 2012. Or looked at from a financial buyers’ vantage point: Quest is being valued at 3.5x trailing services revenue. (The proposed buyout would be the largest purchase of a software company by a PE firm since the equity markets melted down and credit markets tightened up last August.)

Wall Street has already indicated that the offer, representing a 19% premium, isn’t rich enough. (The stock was trading through the bid on Friday afternoon, changing hands at nearly a dollar higher.) Last summer, even without the takeout premium, shares traded above the price the MBO group is offering. Perhaps anticipating that, the MBO has a 60-day ‘go-shop’ period where Quest and its advisers can actively canvass the market for a higher offer. If they secure a superior bid in that two-month window, Quest would be on the hook for a 2% breakup fee, compared with a 3% fee after that time.

PE firms play small ball

Brenon Daly

Contact: Brenon Daly

After years of writing multibillion-dollar checks in some of the largest tech transactions, private equity (PE) shops dramatically scaled back their purchases in 2011. The single biggest deal last year (The Blackstone Group’s $3bn take-private of healthcare technology vendor Emdeon) only ranked 15th among the largest transactions in 2011.

It was the first time PE firms haven’t have a hand in at least one of the year’s 10 largest deals since 2008. Even in the recession-wracked year of 2009, one buyout slotted into the top 10. And in 2010, when the economy appeared to be solidly recovering and the credit markets were more welcoming, PE firms accounted for fully three of the 10 largest transactions of that year. But last year, the buyout barons were overwhelmed by their corporate rivals, who are flush with cash.

Recent Blue Coat shareholders no longer in the red

Brenon Daly

Contact: Brenon Daly

Anyone who bought shares of Blue Coat Systems over the past half-year breathed a sigh of relief after the recent buyout of the old-line security vendor. Thoma Bravo’s bid of $25.81 for each share means that buyers since May are all above water. (The offer represents a 48% premium over the previous close and is almost twice the price that Blue Coat stock fetched on its own back in August.)

But there’s another longtime shareholder that’s probably plenty relieved as well: Francisco Partners. Recall that the buyout firm, which had previously invested in the company, also loaned Blue Coat $80m to help it pay for its purchase of Packeteer in 2008. Francisco took convertible notes, which came at an exercise price of $20.76. Although that was roughly where the stock was trading in the spring of 2008, it finished out the year in the single digits as the recession deepened.

More recently, Blue Coat had been trading below the exercise price for the past four months, hurt by three consecutive revenue shortfalls and turnover in the chief executive office. But with Thoma Bravo’s take-private, which is slated to close in the first quarter of 2012, Francisco Partners will pocket a tidy return. On paper, the firm will book a $19m profit on the convertible notes, equaling a roughly 25% gain. That’s certainly not the biggest gain Francisco Partners has ever put up, but given that the firm spent a fair amount of time underwater on its holding, it’s not a bad outcome at all. And it certainly beats the return from just plunking the money into the broad market, which declined about 10% over the period.

Sterling Partners aids Mosaid

Contact: Thejeswi Venkatesh

Earlier this month, Wi-LAN indicated it would ‘pack up and move on’ if Mosaid Technologies’ shareholders did not accept its sweetened $42 per share unsolicited offer. But in a rather unusual turn of events, it is Mosaid that has moved on. On Friday, the chip technology company announced an agreement with buyout shop Sterling Partners to go private at $46 a share in cash. (Sterling’s bid values Mosaid at about 10 times trailing EBITDA and represents the highest price for the stock in more than a decade.)

Ontario-based Mosaid has many characteristics that make it a good LBO candidate. For instance, it generated $32m in operating cash flow last year. Even more importantly, that cash flow has been fairly predictable thanks to fixed payment agreements with the likes of Hynix Semiconductor, IBM and Samsung. (During the recession-hammered years of 2008 and 2009, Mosaid still generated about the same level of cash from operations.)

And finally, the company has a robust patent portfolio of 2,800 patents. As we have seen in a number of deals recently, IP is increasingly playing a role in M&A, whether it’s the acquisition of Nortel Networks’ patents by a group of companies led by Apple, or the subsequent $12.5bn purchase of Motorola Mobility by Google, the second-largest tech transaction of 2011. Mosaid’s large – and growing – portfolio of patents could well add a bit more to Sterling’s return, when the private equity firm looks to exit this deal.