My security colleagues, writing on their Plausible Deniability blog, recently took a look at widening spread between Barracuda Networks’ unsolicited bid and Sourcefire’s current stock price. They noted that although Sourcefire shares briefly nosed above the $8.25 bid floated by privately held Barracuda, the shares have basically retreated back to the level they were before Dean Drako came calling in late May. Well, the spread turned into a gulf Monday, as Sourcefire stock dropped a buck to just $5.97, the lowest level since the unsolicited bid surfaced. For any arb out there, we would note that’s a 27% discount to Barracuda’s bid.
Category: security
Bygone buyouts
While overall tech spending on M&A has fallen about one-third so far this year, the once-bustling leveraged buyout (LBO) business has virtually disappeared. Just how much? It’s literally dimes instead of dollars. Buyout spending has plummeted from more than $100bn during the first three quarters of 2007 to just $12bn so far this year. That’s about the level of LBOs in 2004, before buyout shops were really looking at tech companies and before banks were comfortable lending for deals in the unproven and cyclical industry. (Of course, we have new problems in the credit market these days.)
Still, LBOs are getting done, despite the disappearance of debt and, in some cases, even the banks that were backing the buyouts. Earlier this week, for instance, Bedford Funding took home on-demand talent management vendor Authoria for $63m, the first of what we expect to be several deals by Bedford in the fragmented human capital management market.
Also, Nokia said earlier this week that it plans to sell its security appliance unit to an unnamed financial buyer. Several sources have indicated that one of the lead suitors for Nokia’s firewall and VPN business is Vector Capital. The San Francisco-based buyout shop already has experience with a security hardware company, having teamed with Francisco Partners to acquire WatchGuard Technologies, the maker of the Firebox UTM appliance for the midmarket, for $151m in July 2006.
PE deal flow
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Source: The 451 M&A KnowledgeBase
Another security buy for VMware?
Although the knickknacks have long since been packed up from VMworld earlier this month, one rumor continues to make the rounds. Several sources have indicated that VMware, the host of VMworld in Las Vegas, has acquired startup Blue Lane Technologies for about $15m. The two companies have been technology partners for more than a year, with Blue Lane’s VirtualShield integrated with VMware’s VirtualCenter.
Security and virtualization in general have been major concerns for VMware. To help shore up the hypervisor and broader virtual environment, VMware in March introduced VMsafe, a set of APIs that third-party security vendors can use to write interoperable programs. Blue Lane was one of about 20 initial partners in VMsafe, as were the security industry’s heavyweights.
If indeed Blue Lane has been acquired (as one industry source and two financial sources reveal is the case), then it marks the end of a company that got its start more than six years ago. When we initially checked in with the vendor shortly after it rolled out its first product three years ago, the Cupertino, California-based company was shipping a patch management appliance. Along the way, it received some $18.4m in two rounds of funding. Remaining startups that are focusing on securing virtual networks include Catbird Networks and Reflex Security.
Selected VMware acquisitions
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Source: The 451 M&A KnowledgeBase *Estimated deal value
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.
Spending the ‘divestiture dividend’
On the same day it closed the divestiture of its authentication business, Secure Computing said it will pay $15m for Securify. The deal, which is expected to close in the fourth quarter, also has a potential $5m earnout. Secure said it plans to add Securify’s identity-based monitoring and control technology to its firewall. The majority of Securify’s customers are government, and Secure Computing plans to cross-sell into that market. Founded in 1998, Securify had raised more than $70m in VC. However, it only generated about $13m in revenue last year. Secure Computing indicated the acquisition would boost earnings next fiscal year.
Buying and building at Google
Since the beginning of 2007, Google has spent nearly $3.5bn on research and development. The freewheeling company, which makes liberal use of the ‘beta’ tag for many of the in-house projects it rolls out, often goes to great pains to present a corporate portrait of uninhibited engineers running wild on their whiteboards, coming up with the next Great Idea. (All the while, founders Sergey and Larry benevolently look on.)
With all the building going on at Google, it’s easy to lose sight of the fact that the company is also buying. In fact, since the beginning of 2007, Google has averaged about a deal a month. That’s about the same acquisition pace as both Cisco and Oracle over the last 18 months, although the sizes of the deals – and the rationale – are very different. Google, for instance, has never purchased a public company.
Instead of the consolidation plays inked by other large vendors, Google tends to pick up small bits of technology or even a team of engineers that the company can eventually turn into a product. Sometimes, the acquisitions show up directly in Google products, such as its mid-2005 purchase of Android Inc. At the time, Android was reportedly working on an operating system for mobile phones, which Google officially unveiled last November. Another example is Google’s purchase in November 2006 of iRows, which became the spreadsheet offering in Google Docs.
Other Google purchases show up only as features in more significant offerings. In May 2007, for instance, Google picked up GreenBorder Technologies, a small company with a fitful history and a doubtful commercial outlook, but some solid technology. Specifically, GreenBorder developed a virtualized browser session, which isolated any browser-based security threats from the user’s computer.
However, not much had been seen from this ‘sandbox’ technology over the past year. At least, not until Google rolled out its new Chrome browser on September 1. One of the key selling points of the would-be killer of Internet Explorer: security. According to Google, Chrome prevents malware from installing itself on a computer through a browser as well as by blocking one tab from infecting another tab. In our opinion, it won’t take many people switching to Chrome to justify the $20m-30m we estimate Google spent on GreenBorder for that acquisition to pay off.
Google deal flow
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Source: The 451 M&A KnowledgeBase
Changing channels
In the hyper-competitive storage market, it seems that one vendor’s pain is another vendor’s gain. We’ve heard from three market sources recently that Dell’s largest-ever acquisition — its $1.4bn purchase of EqualLogic — has hit some difficulties around defections and uncertainties from the SAN vendor’s existing channel partners. Resellers who pushed EqualLogic’s offering in the past are worried about being crushed by Dell’s powerful direct-sales machine, as has happened to some of Dell’s ‘partners’ in the past.
Based on the recent numbers posted by rival SAN vendor Compellent Technologies, there may be something to those concerns. Compellent, which recently signed up its 1,000th customer, said second-quarter sales surged 74% to $21m — which is about what they were for the first two quarters of 2007 combined. (The performance, along with the forecast for profitability for the rest of the year, helped spark a 20% rally in the company’s shares over the past month.) At a recent investment banking technology conference, Compellent CEO Phil Soran told us he’s looking to poach EqualLogic’s channel partners. We’ve heard similar plans coming from rival storage player Lefthand Networks.
How well Dell is able to balance the sales channels for EqualLogic will go a long way toward determining how much of a boost the acquisition will give to its emerging push into storage. Already, the return on EqualLogic is made more challenging by the fact that Dell bought it literally at the top of the market. The day that Dell announced the acquisition, the Nasdaq hit a level it hadn’t seen since early 2001. (The index is currently off 14% since then, after having dropped as much as 23% from its early-November highs.) To make its high-priced acquisition of EqualLogic pay off, Dell is going to have to work hard to keep its new SAN rivals from siphoning off channel sales.
Beijing: unsporting laws on M&A
The opening of the 2008 Beijing Summer Olympics today has the world’s sporting eyes on China. Of course, global dealmakers had their sights on the large (and growing) Chinese markets long before Beijing landed the Olympics. However, as my colleague Anita Cheung notes, those efforts suffered a setback last week when China passed the latest and strictest set of regulations on foreign investment and M&A in 15 years.
The new regulations give the federal government more control over direct foreign investment and take off the table virtually any acquisition of a Chinese company by a foreign firm. Chinese regulators cite national security and antitrust concerns for these recent actions. This is a distressing development for the idea of a global M&A marketplace. While other countries have certainly used regulation to block ‘sensitive’ acquisitions, few have succeeded with a blanket policy blocking essentially all deals.
In the months before these new regulations took effect, several US media and technology companies were able to ink purchases of Chinese companies. For instance, Hearst Business Media acquired ee365.cn, a technology news website for engineers, last month. Also, CNET acquired Beijing-based 55BBS.com in June, while Google picked up Chinese search engine 265.com one month before. And deals aren’t just being inked by US companies. In June, one of Australia’s largest telecommunications companies, Telstra, picked up a controlling stake in two large Chinese Internet companies, Norstar Media and Autohome/PCPop.
Rather than those transactions being models for future M&A activity in China, we would expect to see more deals break down because of politics. In other words, more deals like February’s aborted $2.2bn leveraged buyout of 3Com, which was led by Bain Capital, with minority participation by Chinese networking equipment vendor Huawei Technologies. In that proposed transaction, US regulators got all worked up over the possible threats to US national security of having partial Chinese ownership of 3Com’s TippingPoint Technologies business. The fear was that the Chinese might be able to spy on the US by using TippingPoint’s intrusion-prevention system to gain access to networks. As silly as that seems, it was enough to sink the deal. And unfortunately, China seems to have adopted that as policy.
Recent foreign deals in China
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Source: The 451 M&A KnowledgeBase