Category: LBO

Heading in and out at Vector

Brenon Daly

Contact: Brenon Daly

Some eight months after the opening bid for RAE Systems was announced, it looks like Vector Capital continues to have the inside track in taking private the maker of gas detection monitors. The San Francisco-based buyout firm earlier this week raised its offer for RAE Systems to $2 per share, or roughly $120m. That marks the third time that Vector has bumped its bid in its competition with original bidder Battery Ventures.

Vector’s current offer adds some $25m to Battery’s initial price, and is more than twice the level where RAE Systems shares traded over the year leading up to the first announcement last September. Perhaps most crucially, RAE Systems executives, who own roughly 31% of outstanding shares, have thrown their support behind Vector by giving up shares for no consideration as well as rolling over a large portion of their equity holdings.

While Vector works to add RAE Systems to its portfolio, we understand that it may be looking to free up a spot there as well. Several market sources have indicated that Vector has retained Jefferies & Company to advise it on a possible sale of Corel. Running at more than $200m in sales, Corel has a number of products for graphics design, as well as WordPerfect and WinDVD, among other titles.

Vector has owned Corel since 2003, though it did sell a bit of the software company to the public in 2006 before buying back that chunk three years later. Given that Corel is a fairly large portfolio of mostly mature businesses, we suspect that the most likely buyer would be a fellow PE shop. However, the process is still in its early days, according to a source.

TI-NatSemi: Large and analog

Brenon Daly

Contact: Brenon Daly

The fragmented market for makers of analog integrated circuits looks a whole less scattered now that Texas Instruments has reached for National Semiconductor. Already the largest analog vendor, TI will have some 17% of the market provided its $6.5bn all-cash offer for NatSemi closes later this year. (If it can’t close the deal, for whatever reason, TI faces a $350m reverse breakup fee, while NatSemi would have to pay a $200m termination fee.)

As it stands, the pending purchase of NatSemi would be the third-largest semiconductor deal, but the single largest by a non-financial buyer. Recall that in the pre-Credit Crisis days of 2006, buyout consortiums took Freescale Semiconductor private in a $17.6bn buyout while another private equity (PE) club carved the semiconductor business out of Royal Philips Electronics. Given the travails that the Freescale LBO has faced over the past half-decade, we suspect that PE shops won’t be looking to do any buyouts that big anytime soon.

Multiples match on Lawson and Epicor

Brenon Daly

Contact: Brenon Daly

If nothing else, we now know the clearing price for ‘vintage’ ERP companies. (Or more accurately said, we know the proposed clearing price.) That’s at least one conclusion we can draw from the highly unusual situation where there are two deals going on simultaneously for two of the industry’s larger players, Epicor Software and Lawson Software. The two planned acquisitions – representing, collectively, $2.8bn of spending – line up almost exactly in several key metrics.

The numbers: the equity value of Apax’s offer for Epicor is $976m, with an enterprise value (EV) of $1.1bn. On an EV basis, that works out to about 2.5 times trailing sales and roughly 5x maintenance revenue. That mirrors very closely the takeout valuation that Lawson received in an unsolicited bid last month from PE-backed Infor Global Solutions, which it is currently reviewing. Lawson is being valued at 2.4x trailing sales and about 4.5x maintenance revenue. Even on an EV/EBITDA basis, the valuations are not all that dissimilar: Epicor garnering a 20.5x valuation, compared to Lawson’s 15.4x.

PE firms back at the table

Brenon Daly

Contact: Brenon Daly

The buyout barons might not be as powerful as they were before the Credit Crisis, but that doesn’t mean the financial buyers can’t elbow aside their rivals from the corporate world. Earlier this week, Golden Gate Capital topped an existing agreement that Conexant Systems had with fellow chipmaker Standard Microsystems. While it wasn’t unusual for private equity (PE) firms to take auctions when credit was flowing cheap and easy, it’s been relatively rare in the past two years.

Terms call for Golden Gate to hand over $2.40 for each share of Conexant, giving the deal an equity value of roughly $180m. (Additionally, the company carries $86m of net debt.) The buyout firm’s all-cash offer topped a cash-and-stock bid of $2.25 per share from Standard Microsystems. The new agreement has a ‘no shop’ clause and is not conditional on financing. It also carries a $7.7m breakup fee, exactly the same amount that Standard Microsystems is pocketing for its trouble.

A 7% bump in acquisition price may not seem like much, but it could be an early signal that PE firms are getting much more aggressive in deals. That’s actually what corporate development executives told us they expected in 2011 from their PE rivals. In our annual survey, nearly four out of 10 (38%) corporate buyers said they expected more competition from buyout shops, compared to just 13% who said the opposite.

Teradata pays a tidy premium for Aprimo

Brenon Daly

Contact: Brenon Daly

Announcing its first major acquisition since it was spun off into a stand-alone company more than three years ago, Teradata said it will pay $525m in cash for Aprimo. The deal marks a significant bet by the data-warehousing giant on the application market. Specifically, Aprimo brings a marketing automation offering to run on top of Teradata’s existing business analytics offering. Aprimo products will continue to be marketed and sold under the company’s name once the transaction closes, which is expected in the first quarter.

According to a conference call discussing the acquisition, Aprimo is expected to generate about $80m in annual sales. (We understand that roughly $60m of that is recurring revenue.) That means Teradata is paying a healthy 6.5 times revenue for Aprimo. That’s slightly ahead of the valuation that IBM paid in its big marketing automation play four months ago. Big Blue handed over $523m in cash for Unica, valuing the publicly traded company at 4.8 times trailing revenue.

Part of Aprimo’s premium could likely be attributed to the fact that it was steadily moving its business from a license model to a subscription basis. In fact, Aprimo’s SaaS offering accounted for a majority of its revenue. IBM’s move was important in the Aprimo process, as we gather that Teradata and Aprimo started talking only after Big Blue had closed its acquisition.

Buyouts are back

Brenon Daly

Contact:  Brenon Daly

The pending take-private of Novell underscores just how much private equity (PE) activity has rebounded since the Credit Crisis nearly shut down tech buyouts. The $2.2bn purchase of infrastructure software and SUSE Linux vendor Novell stands as the seventh PE tech deal so far this year valued at more than $1bn. That’s up from five big-ticket transactions in all of last year and only four in 2008.

What’s behind the buyout boom? The reopened debt market has allowed PE shops to make bigger bets once again. Consider this: With still more than a month left to go in 2010, PE firms have already tallied 264 deals valued at $30.2bn. The spending level is 50% higher than in all of 2009 and tops 2008, as well.

Also adding to the spending totals is the fact that targets are getting richer valuations. We’ve seen a trio of large leveraged buyouts (LBOs) go through this year with enterprise values of 4 times sales or even higher. However, that’s not the case with the latest LBO for Novell. Cash-rich Novell is garnering an enterprise value of $1.2bn, or just 1.5 times sales. Still, Novell’s LBO price is about 50% higher than where the company was valued at the start of the year.

PE Activity

Year Deal volume Deal value
YTD 2010 264 $30.2bn
2009 301 $19.7bn
2008 249 $24.8bn
2007 305 $118.4bn

Source: The 451 M&A KnowledgeBase

Not pretty, but it’s done at Novell

Brenon Daly

Contact: Brenon Daly

After holding out for more than eight months, Novell finally accepted on Monday a $2.2bn buyout offer from private equity-backed Attachmate. From the outside, it looks like a case where the buyer – or maybe more accurately, the hedge fund that put the company in play – simply wore down Novell. Under terms, Attachmate will hand over $6.10 in cash per share, or roughly $2.2bn, for Novell.

Yet if we step back and look at the offer, we can’t help but notice that the company is now embracing a bid that only values it slightly more than the original offer that put it in play. For the record, Novell’s board said three weeks after receiving the unsolicited bid from gadfly investor Elliott Associates that the offer of $5.75 for each share ‘undervalues’ the company and its prospects.

Apparently, Elliott’s opening bid wasn’t all that lowball because the company is selling for just 6% more than the offer that ‘undervalued’ it. We would also mention that Novell traded above the $6.10 bid several times over the summer, albeit on pure speculation. (JP Morgan Securities advised Novell, while Credit Suisse Securities and RBC Capital Markets worked for Attachmate.) The deal is expected to close in the first quarter of 2011, pending shareholder approval.

To be fair, the fact that Novell’s board got shareholders even a slight bump above the original offer should be viewed as a sell-side accomplishment. After all, Novell is a hoary, mixed-bag of businesses, with each unit attracting specific suitors. All of that made for an undoubtedly complicated process, with multiple permutations on bidders and bidding teams, as we understand it. (Companies we heard that may have taken a serious look at some point at Novell – or at least some of its businesses – include VMware and Oracle, among others.) Indeed, as part of the transaction, Microsoft will be acquiring a sprawling portfolio of 882 patents from Novell for $450m.

And beyond all of the complications around matchmaking is the fundamental fact that Novell just isn’t that attractive, regardless of whatever business we look at inside the company. Each component of its revenue (license, maintenance/subscription, services) has dropped so far this year, which is part of the reason why Novell has come up short of Wall Street expectations every quarter this year. Overall, sales have dropped 6% in 2010, and current projections call for Novell’s revenue to decline next year, too. So as we look at it, the board probably did a fair job to get Novell valued at $1.2bn (net of cash), which works out to basically 1.5 times sales. Novell shareholders will now have their say on the outcome of the more than eight-month process.

Rich tech companies put away their checkbooks

Brenon Daly

Contact: Brenon Daly

Where are the corporate buyers? That’s what we were wondering when tech M&A activity in October came in well below both the year-ago period and the monthly average so far this year. Consider this: October stands as the first month in 2010 that so-called strategic buyers didn’t announce a single transaction valued at $1bn or more.

Instead, the shopping in October was led by private equity (PE) shops, notably The Carlyle Group. The buyout firm announced the two biggest tech deals of the month, with back-to-back acquisitions of CommScope and Syniverse Technologies. Carlyle values those two purchases at $6.5bn – representing half the value of all tech M&A spending in October. (See our full report on October’s M&A totals.)

Carlyle’s big pair of deals in October follows a more representative September, when IBM and Hewlett-Packard held the top two spots for large deals. (IBM paid $1.8bn for Netezza on September 20, a week after HP said it will pay $1.65bn for ArcSight.) More broadly, tech companies have posted a number of 10-digit transactions since the summer, with Intel notching two of them, plus the typically acquisition-averse SAP doing the largest deal in its history in May.

It’s hard to figure out exactly what’s keeping companies out of the market these days. Third-quarter financial results, many of which were announced in October, have been solid for the most part. Similarly, guidance for the fourth quarter and into 2011 has been relatively upbeat. Reflecting that, the Nasdaq tacked on nearly 6% in October, helping the tech-heavy index approach the highs that it hit both back in April and in mid-2008. Further, the cash just keeps gushing into the treasuries at many tech companies.

Internet infrastructure in Q3: a dip in deal volume

Ben Kolada

Contact: Ben Kolada

In the just-closed quarter, we noticed a slight dip in the number of announced deals. In fact, the deal volume has continued its slide ever since the industry hit its peak in the first quarter of 2010. That’s not to say that our readers should make like Equinix’s investors and run for the exit. True, deal volume did slide downward, but the brand names of the Internet infrastructure industry continued to make long-term investments.

The total number of transactions announced in the third quarter declined 13.5% from the second quarter and 27.3% from the first quarter of the year. However, we must note that Q1 deal volume was, in fact, artificially inflated somewhat as some deals that were put on hold during the worst part of the recession in 2009 were finally closed in Q4 2009 and the beginning of 2010 due to renewed optimism in the economy and the ability to once again access capital at reasonable rates.

Overall, the number of transactions is up year over year, with Q3 2010 yielding 23% more transactions than the year-ago period. In fact, the total number of deals announced in the first three quarters of this year has already topped the full-year total for 2009. Furthermore, well-established names in the Internet infrastructure sector, including Digital Realty Trust, Limelight Networks and TeleCity on the industry side and GI Partners, Sequoia Capital and Welsh, Carson, Anderson & Stowe on the investment side, just to name a few, came to the table in the third quarter. We’ll take a deeper look at Q3 deal volume in a report that will be included in tonight’s Daily 451 sendout.

Recent quarterly deal flow

Period Number of transactions Percent change from previous quarter
Q1 2009 12 –
Q2 2009 17 42%
Q3 2009 26 53%
Q4 2009 28 8%
Q1 2010 44 57%
Q2 2010 38 -14%
Q3 2010 32 -16%

Source: The 451 M&A KnowledgeBase, Tier1 Research

Third-quarter M&A: Forget the headlines

Brenon Daly

Contact: Brenon Daly

To get an accurate read on M&A this summer, you have to look past the headlines. Undeniably, there were a few high-profile deals, including the sale of McAfee in the largest deal ever in the security industry, as well as a high-profile bidding war that pushed 3PAR’s valuation into the double digits. Beyond those transactions, however, deal flow in the third quarter, which wraps today, has been distinctly average. Spending is coming in at $46bn, only slightly above the average spending of $40bn in the eight quarters since the Credit Crisis erupted.

The $46bn also sits at the midway point of spending in the first two quarters of the year ($30bn in Q1 2010 and $62bn in Q2 2010). It also nearly splits the difference between the previous year’s quarter ($38bn in spending in Q3 2009) and the previous quarter this year ($62bn in spending in Q2 2010). We’ll look at why the value of deals announced in late summer dropped one-quarter from the record level in early summer in a special report tonight, but for now consider this: Of the five largest transactions so far in 2010, just one was announced in the third quarter. Again, we’ll have a full report on Q3 M&A in tonight’s Daily 451 and 451 TechDealmaker sendouts.