Category: networking

Franklin Templeton nets healthy return on AboveNet

Contact: Thejeswi Venkatesh

Zayo Group announced the acquisition of fiber network provider AboveNet on Monday, a move that should help the serial buyer expand its fiber footprint geographically. The bid of $84 per share, which values AboveNet at $2.2bn, represents the highest trading price in the company’s history. There was one shareholder that was particularly pleased with the long-mooted sale of the fiber operator: Franklin Mutual Advisers (FMA), which roughly tripled its investment return in AboveNet.

FMA, an operating subsidiary of Franklin Templeton Investments, bought a 21.6% stake in AboveNet for $128m when the company emerged from bankruptcy in 2003. Zayo’s acquisition values FMA’s current stake of 17.6% at $387m, representing a compound annual rate of return in excess of 14% (including the $5-per-share dividend in 2010). That’s a healthy return at a time when equity risk premiums are hovering at about 6%.

Few targets left in FEO, but are there any buyers?

Ben Kolada

Contact: Ben Kolada

In the past year, networking vendors have acquired many of the independent front-end optimization (FEO) startups, further narrowing the field in this already niche sector. In fact, there are only a few notable independents left. But is this really a race to consolidate the market, or are acquirers simply adding these capabilities to their portfolios by picking up properties at fairly cheap prices?

FEO focuses on getting a browser to display content more quickly, as opposed to dynamic site acceleration and other services that use network optimization to speed content delivery. For the most part, the FEO segment has been made up of a handful of startups. However, consolidation in the past year took three of these companies out of the buyout line. In May 2011, AcceloWeb sold to Limelight Networks for $12m and two months later Aptimize sold to Riverbed for $17m. Terms weren’t disclosed on Blaze Software’s recent sale to Akamai, but we’re hearing that the price was in the ballpark of $10-20m. That leaves Strangeloop Networks as one of the last companies standing, and its fate is basically secured. After the Blaze deal severed Strangeloop’s partnership with Akamai, the company is likely to find an eventual exit in a sale to remaining partner Level 3 Communications.

Firms interested in entering this sector shouldn’t fret over potentially losing Strangeloop to a competitor. Instead, they should actually reconsider their entry into the FEO market. FEO providers, both past and present, have done little to validate the space. According to our understanding, Aptimize was the largest of the acquired vendors, and its revenue was only in the low single-digit millions. The fact that each target sold for no more than $20m further suggests that the market isn’t yet living up to expectations.

Cable & Wireless Worldwide may lose independence

Ben Kolada

Contact: Ben Kolada, Thejeswi Venkatesh

Just two years after parent company Cable & Wireless Group split itself into two businesses, the consumer division Cable & Wireless and the business services unit Cable & Wireless Worldwide (CWW), CWW may once again find itself as part of a larger organization. Vodafone confirmed Monday that it is in talks regarding the possible acquisition of CWW. The deal, which is rumored to be valued at roughly $1bn, should be welcome news to CWW’s investors, who have seen the company’s stock plummet by two-thirds in the past year.

Independent CWW, which provides fixed lines that link to wireless transmitters and switches, among other voice and data services, has fared poorly since the split, as revenue flatlined and the company issued several profit warnings. However, exploding Internet usage on mobile phones has caused renewed interest in CWW. Vodafone, which is light on its fixed-line capacity in the UK, would likely use the acquisition to enable more bandwidth availability for its mobile users. Vodafone will be able to take advantage of CWW’s vast infrastructure to backhaul its own cellular services, rather than rely on third-party operators. CWW’s investors are hopeful that the deal will come to fruition, with shares of the telco closing the trading day 30% higher. Vodafone has until March 12 to make a decision on the acquisition.

Webinar: The future of enterprise IT

Brenon Daly

Contact: Brenon Daly

In this era of disruptive technologies, what does the future hold for enterprise IT? What new innovations are expected to reshape software, networking and even the datacenter itself in the coming year? For a look ahead, join us for a special webinar on Thursday, February 9 at 9:00am PST/12:00pm EST. (Click here to register.) The heads of several practice areas at 451 Research will highlight a number of key trends in their sectors, and what impact that will have on the broader IT landscape.

Topics we will cover in the hour-long webinar include the emergence of truly virtualized infrastructure, the rise of software-defined networks and the trend toward modularity inside the new datacenters. We will also cover some of the financial implications of those trends, both in terms of capital raising and M&A valuations. To join the webinar on Thursday, simply register here.

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.

HP takes itself out of the market

Brenon Daly1 Comment

Contact: Brenon Daly

Over its two previous fiscal years, Hewlett-Packard has spent more than $20bn on a dozen acquisitions, with five of them costing the tech giant more than $1bn each. Those days are over, according to recently named CEO Meg Whitman. In her first conference call discussing quarterly financial results on Monday, Whitman told investors not to expect any ‘major M&A’ in the current fiscal year, which runs through the end of next October. That means HP will look to ink deals valued mostly at less than $500m, she added later in the call.

That conservative M&A plan comes as HP enters what Whitman described as a ‘reset and rebuilding year.’ Both revenue and earnings are projected to slide in the current fiscal year, but HP didn’t offer specifics on the decline. The company scrapped its revenue forecast altogether, while saying only that it expected to earn ‘at least’ $4 in non-GAAP earnings per share (EPS), compared to $4.88 in non-GAAP EPS in the just-completed fiscal year. With roughly two billion shares outstanding, that indicates HP will likely net at least $1bn less this year than last year. No wonder HP isn’t in the mood to go shopping these days.

ViVu bolsters Polycom’s Web-based videoconferencing credentials

Contact: Thejeswi Venkatesh

After sitting out of the market for four years, Polycom’s M&A wheels are turning once again. The acquisition of ViVu on Monday was the company’s third purchase this year, and helps Polycom round out its videoconferencing offerings. With many observers expecting video collaboration to become ubiquitous, the purchase helps Polycom extend its offerings into the Web videoconferencing arena – in-line with its declared strategy.

Terms of the deal were not disclosed, but we understand that ViVu was generating less than $2m in revenue. Cupertino, California-based ViVu, which came to market in 2010, had raised just $3.2m in venture funding and was looking to score a second round at the time of its acquisition. (Other companies in the space, including Vidyo and Blue Jeans Networks, have been successful at landing substantial amounts of funding.) Given these dynamics, we suspect that ViVu received a healthy multiple and we wouldn’t be surprised if other suitors, including TIBCO Software, were involved in the bidding process.

The transaction comes at a time of dramatic changes in the videoconferencing market. Microsoft closed its pickup of Skype – the largest-ever purchase for the tech giant – just last Friday. ViVu provides a plug-in for Skype and Polycom has worked with Microsoft on its Lync offering for a number of years. Polycom believes that the two deals will expand its market opportunities.

Select Polycom acquisitions

Date announced Target Deal value Focus
October 17, 2011 ViVu Not disclosed Web-based videoconferencing capabilities
June 1, 2011 HP (visual collaboration business) $89m Videoconferencing
March 23, 2011 Accordent Technologies $50m Non-real-time capabilities
February 7, 2007 SpectraLink $220m Wireless IP telephony

Source: The 451 M&A KnowledgeBase

Braving the IPO market

Contact: Thejeswi Venkatesh

While the IPO pipeline is getting drier, GCT Semiconductor has taken the contrarian route, filing paperwork for its proposed $100m offering. The company, a fabless designer and supplier of 4G mobile system-on-a-chip semiconductor solutions, has seen revenue triple from 2009 to $68.64m. With the mobile industry transitioning to 4G to handle the increase in rich media content, GCT thinks it could be on the verge of seeing sustained growth.

Clearly, that growth is what GCT will be selling on Wall Street. The planned offering resembles the Sequans Communications IPO, with the business profiles and financials of the two companies lining up similarly. For instance, both firms had nearly identical revenue at the time of filing and neither had an operating profit. Sequans came to market in April at 5 times trailing sales, a valuation we suspect GCT would be delighted with, since Sequans is currently trading at 2-3x trailing sales.

Across the tech sector, vendors planning to go public have instead ended up inside companies that are already public. In June, ANSYS pulled Apache Design Solutions from its IPO track and acquired it for $335m. Similarly, SiGe Semiconductor accepted a bid from Skyworks Solutions in May. With Qualcomm, Intel and Broadcom investing heavily in 4G solutions, we wouldn’t be surprised if one of these well-funded players snared GCT.

The ball is rolling in semiconductor networking M&A

Ben Kolada

Contact: Ben Kolada, Thejeswi Venkatesh

In announcing its largest-ever deal, and paying a princely price at the same time, Broadcom is keeping the ball rolling in semiconductor networking M&A. The company’s nearly $4bn pickup of NetLogic Microsystems comes less than two months after rival Intel announced a smaller strategic play of its own, and it likely won’t be the last transaction before the buyout curtain closes.

After a dearth of big-ticket semiconductor networking acquisitions, such vendors are now becoming hot properties. Before announcing its landmark NetLogic purchase, Broadcom itself bought networking provider Teknovus in February 2010 for $123m (in an earnings call, Broadcom mentioned that Teknovus generated revenue in the single digits of millions, which implies a price-to-sales valuation far north of 10x). And in July, Intel announced that it was acquiring Fulcrum Microsystems for a price we hear was in the ballpark of $175m, or about 13x trailing sales.

Broadcom’s richly priced offer for NetLogic, which values the target at 9.2x trailing sales, likely won’t be the last deal in this sector. If you ask The Street, the next companies to get scooped up could be Cavium Networks or EZchip Technologies. Shares of both firms surged following Broadcom’s announcement. As for likely acquirers, we could point to deep-pocketed vendors Qualcomm and Marvell Technology. With $10.7bn and $2.4bn of cash in their coffers, respectively, either company could easily digest Cavium, which currently sports a market cap of roughly $1.7bn.

Will a stabilized Cisco step back into the market?

Brenon Daly

Contact: Brenon Daly

After back-to-back quarters that roughed up the networking giant, Cisco reported on Wednesday a reasonably strong close to it fiscal year. Fourth-quarter revenue and earnings at the company topped Wall Street’s expectations, and included a rebound in Cisco’s core switch business. The company also projected that its overall growth would continue in the current fiscal first quarter, although the rate would be just 1-4%.

Chief executive John Chambers stopped short of using one of the metaphoric expressions like ‘air pockets’ or ‘uncharted waters’ that he has used in the past to describe economic uncertainty, but he said repeatedly on the conference call discussing results that the economy is facing numerous ‘challenges.’ From our perspective, we wonder if Cisco will get its M&A machine humming again if it continues to stabilize its business.

The company announced a deal in each of the first three months of 2011, but has been notably absent since then. In other words, Cisco has been out of the market since it first let on that business was getting tougher. Will that change now that business appears to be picking up again?