Category: storage

Tech buyers shop locally

-by Yulitza Peraza, Brenon Daly

Although the Delaware Court of Chancery was slated to rule this week on Emulex’s poison pill, the court punted on the decision. In postponing the ruling on the poison pill, which has been a key part of Emulex’s defense against the unwanted advances of Broadcom, the judge indicated that the two sides may well be able to work out a deal over the next week. Broadcom, which took its bid public on April 21, recently extended the deadline of its tender offer until July 14. The extension came as Broadcom also raised its bid to $11 per share for Emulex, up from $9.25. That added about $150m to the price of Emulex, which is currently valued at some $912m. As we noted earlier, Broadcom’s initial offer essentially valued Emulex where it was trading last October.

Unsolicited offers for tech companies, while increasing, are still relatively rare. However, in one regard, Broadcom’s bid for Emulex is rather typical. Scouring our data, we noticed a significant trend among California tech vendors: they tend to shop locally. That’s certainly true for these two southern California firms, which are only about 10 miles from one another. In the last seven years, about half of total tech M&A spending by California-based buyers went toward acquiring other Golden State tech companies. We would add that the ‘shop local’ trend isn’t limited to California, which stands as the most-developed tech region in the world. It’s also true on the other side of the country, where tech vendors based on the East Coast have spent more on acquiring neighboring tech firms than they have on companies from anywhere else.

There are a number of reasons for this trend, both formal and informal. For starters, the two sides are more likely to have a number of connections, sharing financial backers or board members, for instance. Additionally, executives at the companies may belong to the same local tech organizations or business groups. (Or, more informally, they may frequent the same restaurants or belong to the same clubs.) In some ways, our finding flies in the face of the oft-repeated notion that the world is flat, with business flowing around the globe without regard to borders or geography. That may well be true in some aspects. But when it comes to M&A, business is still largely done locally.

Geographic tech M&A, 2002-2009

Acquirer state/region Target Number of deals Percentage of total deals Total value Percentage of total value
California All 2,389 100% $247bn 100%
California California 879 37% $126bn 51%
East Coast All 2,391 100% $282bn 100%
East Coast East Coast 758 32% $83bn 30%

Data Domain: Battle at Centre Court

Brenon Daly

Contact: Brenon Daly

A long, drawn-out battle – with back-and-forth volleying – to claim a coveted prize. We could be talking about the amazing men’s final at Wimbledon over the weekend, but since we’re back in the office, we’re actually referring to the ongoing fight over Data Domain. On Monday, EMC served up what it hopes will be an ace. It raised its existing all-cash offer for the data de-duplication specialist to $33.50 per share.

EMC’s latest bid values Data Domain at roughly $2.3bn, richer than its previous offer as well as the one from original suitor NetApp. Recall that NetApp served first, offering $1.75bn in cash and stock for Data Domain on May 20. EMC returned that with a $2.1bn bid of its own a week and a half later. And now, EMC has knocked a shot that, honestly, we feel NetApp will have trouble stretching to get. Our view: Advantage EMC.

Is Dell in the market for a GlassHouse?

Brenon Daly

Contact: Brenon Daly, Simon Robinson

After getting its M&A machine revving in the second half of 2007, Dell largely unplugged it after that. It has inked just three deals over the past year and a half, and only one of those has been significant. In February 2008, Dell spent $155m for email-archiving company MessageOne, in a transaction that was a bit of a family affair. The other two buys: a $12m play for a consulting shop and a tiny amount for a Web address to help sell its Adamo line of laptops.

And now, Dell’s efforts to bring in a new executive to do deals for the company have gotten hung up. David Johnson, formerly IBM’s top dealmaker, had been tapped to take over that role at Dell. However, Big Blue sued Johnson, saying the move to Dell would violate the terms of his employment agreement. (Meanwhile, back in Armonk, New York, Cosmo Nista, who had worked corporate development for IBM’s hardware division, has been named acting head of M&A at the company, replacing Johnson, according to one source.)

If Dell is looking to do a deal, our research director for storage, Simon Robinson, has come up with a pretty solid nomination: GlassHouse Technologies. The IT infrastructure services vendor pulled its IPO paperwork in March and recently indicated that it may do some shopping of its own. However, if GlassHouse were to go to the other side of a transaction, it could very well be in a sale to Dell, which is already an investor in GlassHouse as well as being its largest partner. And strategically, the services offered by GlassHouse would fit nicely with Dell’s effort to become a larger supplier of servers and storage to its enterprise customers.

A ‘feature rich’ bidding war for Data Domain

Brenon Daly

Contact: Brenon Daly

A multibillion-dollar bidding war over a technological feature? As crazy as it sounds, that’s one way to look at the contested effort to acquire Data Domain. (Obviously, the company offers much more than the data de-duplication technology that it’s known for. But some rivals – and even one of its current suitors – have nonetheless dismissed Data Domain as a ‘feature’ in the past.) EMC on Monday topped NetApp’s two-week-old agreement to pick up Data Domain.

Even though EMC raised the bid on Data Domain to $30 in cash for each share, the market is clearly expecting more. In mid-afternoon trading Tuesday, Data Domain shares were changing hands at $31.27 – roughly 4% above EMC’s offer. NetApp, which originally offered $25 in cash and stock for each share of Data Domain, hasn’t yet responded to EMC’s move. (As an aside, the bid-and-raise for Data Domain came just hours after we noted bidding wars for two other public companies.)

EMC entering the fray for Data Domain isn’t surprising. According to its offer to purchase the company filed with the US Securities and Exchange Commission, EMC planned to discuss an acquisition with Data Domain in early May, but the target cancelled the meeting. Only a few days later, NetApp, which is being banked by Goldman Sachs, announced its bid for Data Domain, advised by Qatalyst Partners. At this point, EMC hasn’t formally retained a banker to advise it on landing Data Domain (much to the dismay of fee-hungry bankers everywhere). Incidentally, speaking of Qatalyst, the boutique officially announced that it has hired former Goldman Sachs software banker Ian Macleod, which we heard about more than two months ago.

Just how far has the CDP market fallen?

Brenon Daly

by Brenon Daly, Henry Baltazar

In the days before the big storage vendors turned continuous data protection (CDP) into a feature rather than a stand-alone product, investors in CDP startups could still make decent returns. Both Kashya and Topio raised about $20m in VC backing, and ended up exiting for eight times that amount. Kashya sold to EMC for $153m in cash in May 2006 while Topio, which wisely blended CDP with heterogeneous replication in its offerings, went to NetApp for $160m in cash a half-year later. (Of the two deals, NetApp-Topio has been the underwhelming transaction. NetApp recently shuttered the SnapMirror for Open Systems product line that it picked up with Topio.)

Since those paydays, however, CDP valuations have plummeted. Symantec acquired assets of Revivio for an estimated $20m in November 2006, while Double-Take Software handed over just $8.3m for TimeSpring Software in late 2007. But even those deals seem rich when we consider BakBone Software’s recent reach for CDP startup Asempra Technologies. Under terms of the deal, BakBone is shelling out just $2.1m for Asempra, which had raised $36m from its backers. To add insult to injury, BakBone is paying for the acquisition mostly in equity, with $1.7m of the price tag covered by its illiquid, Pink Sheets-traded paper. We would note that Asempra’s owners are getting 3.8 million shares of BakBone, which typically only trade about 30,000 shares each session.

Select CDP transactions

Date Acquirer Target Price
May 2009 BakBone Software Asempra Technologies $2.1m
December 2007 Double-Take Software TimeSpring Software $8.3m
November 2006 Symantec Revivio $20m*
November 2006 NetApp Topio $160m
May 2006 EMC Kashya $153m
March 2006 Atempo Storactive Not disclosed

Source: The 451 M&A KnowledgeBase *451 Group estimate

Going it alone can be expensive

Brenon Daly

Contact: Brenon Daly, Henry Baltazar

Wall Street hasn’t been particularly supportive of tech companies that turn down unsolicited offers and opt to go it alone. Shares in a number of the targeted firms are currently changing hands at less than half the level that the would-be suitors were willing to pay for them. To wit: Microsoft was reportedly set to pay in the mid-$30s for each share of Yahoo, which is now trading in the mid-teens. And having spurned a $16-per-share unsolicited bid from Cadence Design Systems last summer, Mentor Graphics stock is now trading at about $7.

We mention that bit of cautionary history because there’s another showdown brewing. Broadcom, advised by Banc of America Securities, recently offered $9.25 for each share of Emulex, giving the unsolicited bid a total equity value of $764m. (As it often does, Goldman Sachs is advising the target.)

Broadcom’s bid values Emulex where it was trading last October. On an enterprise value basis, the proposed transaction values the maker of storage networking gear at just 1.2x its trailing 12-month (TTM) sales and 5.5x TTM EBITDA. Emulex investors want a richer valuation and have pushed the stock above $10 since the offer was unveiled. Broadcom has vowed to take the unsolicited bid directly to shareholders if the Emulex board rebuffs it. On its conference call Monday discussing fiscal third-quarter results, Emulex said only that it was ‘thoroughly’ reviewing Broadcom’s offer.

From Broadcom’s point of view, it’s understandable why it would want its fellow southern California-based company. If the deal goes through, Broadcom would get a foothold in a few interesting storage markets such as host bus adapters (for both standard servers and blade servers) and embedded storage processors for disk arrays. Broadcom sells Gigabit Ethernet and 10-Gigabit Ethernet products, but is not a player in the SAN market. With network convergence growing in popularity, Broadcom would also benefit from Emulex’s fiber channel technology and its new Fiber Channel over Ethernet adapters.

Oracle-Sun: a system on the cheap

Brenon Daly

Contact: Brenon Daly

Oracle’s big step into the hardware market comes at a relatively small price. In buying Sun Microsystems, Oracle is paying just one-tenth the valuation that it paid in its other multibillion-dollar acquisitions. The difference: the other purchases added software vendors with increasing sales and solid profitability, while Sun provides neither of those. Sun revenue is likely to slip about 10% in the current fiscal year, which ends in June, and the company has lost money in three of the past four quarters.

Still, the valuation drop-off is striking. Sun had generated some $13.3bn in trailing 12-month (TTM) revenue. Based on an offer that gives Sun an enterprise value (EV) of $5.6bn, Oracle is paying just 0.42x Sun’s TTM sales. In the four other acquisitions worth more than $1bn that Oracle has inked, the company has paid between 3.7x EV/TTM (Hyperion Solutions) and 5.2x EV/TTM sales (BEA Systems.)

Oracle’s multibillion-dollar deals

Date Target Equity value EV/TTM sales
December 2004 PeopleSoft $10.46bn 3.9x
January 2008 BEA Systems $8.5bn 5.2x
April 2009 Sun Microsystems $7.4bn 0.46x
September 2005 Siebel Systems $5.85bn 4x
March 2007 Hyperion Solutions $3.3bn 3.7x

Source: The 451 M&A KnowledgeBase

WDC goes SSD

-Contact Thomas Rasmussen

The market for solid-state-drive (SSD) technology is heating up. As an increasing number of consumer and enterprise products (including servers, desktops, laptops and netbooks) incorporate the technology, some old-line technology companies are looking to expand their SSD offerings. Western Digital acknowledged that last week by acquiring SSD vendor SiliconSystems for $65m in cash after about a year of on-and-off talks. (It was Western Digital’s first purchase since its $1.14bn acquisition of Komag in mid-2007.) On the other side, SiliconSystems had taken in just $14m in venture capital since its inception in 2002 from Miramar Venture Partners, Rustic Canyon Partners, Samsung Ventures America, Shepherd Ventures and SanDisk.

We understand that SiliconSystems generated about $50m in trailing 12-month (TTM) sales, meaning Western Digital paid about 1.3x TTM sales for the startup. This is in line with historical averages for the space, but comes at a time when the median valuation for venture-backed startups has been nearly cut in half. In the first quarter of 2009, the median valuation in a sale for a VC-backed tech company sank to just 2.1x TTM sales, compared to 3.8x TTM sales during the same period last year. (See our full report on first-quarter M&A.)

SiliconSystems will be re-branded as Western Digital’s Solid-State Storage business unit and will be headed by former CEO Michael Hajeck, who used to run STEC Inc’s enterprise SSD division. The importance of this relatively small acquisition should not be underestimated. Having essentially become a player in the SSD space overnight, Western Digital has taken the first step toward securing its future survival. With $1.4bn in cash, we wonder if Western Digital will continue to use acquisitions to expand in this market. Possible targets are Hajeck’s former employer STEC, which we previously speculated might be on sale, as well as Smart Modular Technologies. There are also a few potentially disruptive startups out there worth looking at such as Pliant Technology, Texas Memory Systems and Fusion-io.

Western Digital M&A

Date announced Target Enterprise value Price to sales multiple
March 30, 2009 SiliconSystems $65m 1.3x*
June 28, 2007 Komag $1.14bn 1.1x
July 24, 2003 Read-Rite $172m 1.0x

Source: The 451 M&A KnowledgeBase *451 Group estimate

IBM-Sun: Nothing but March madness?

Brenon Daly

Contact: Brenon Daly

Maybe the speculation around IBM buying Sun Microsystems was nothing more than a bit of March Madness. When reports surfaced last month that a deal could be in the works, Sun’s long-ailing shares soared from about $5 to nearly $9 in a single session. (At the time, we also looked at what a potential pairing of the tech giants might mean.) And it wasn’t just sporadic trading that powered the mid-March move. More than 160 million Sun shares traded the day after The Wall Street Journal carried its report on initial talks, meaning volume was eight times heavier than average.

It turns out that anybody who bought the stock from then until last Friday is now underwater. (Or to continue our NCAA basketball terminology, they’ve had their bracket busted.) Both the WSJ and The New York Times reported Monday that a deal – even at a lowered price – may be off the table. Sun shares gave up one-quarter of their value in Monday afternoon trading, falling to about $6.50 each. Volume was again several times heavier than average.

Amid all these reports of tough negotiating and ‘recalibrated’ deal terms, we’re reminded of the five-month saga of one public company buying another public company last year. In mid-July, Brocade Communications unveiled a $3bn offer for Foundry Networks, paying nearly all of that in cash and only a tiny slice in equity. As the equity markets plunged last October, the two sides agreed to lower the deal value to $2.6bn by trimming the cash price and removing the equity component. (Brocade shares had been cut in half during the time from the announcement to the readjustment.)

Now, the combined Brocade-Foundry entity, which has existed since mid-December, has a total market capitalization of just $1.5bn. In fact, my colleague Simon Robinson recently speculated that Brocade may be attracting interest from suitors. One of the names that has popped up? IBM, which would get an instant presence in the networking market. And if Big Blue is done with Sun (as reports suggest), then perhaps the company will just shift its M&A focus.

A (Big) Blue-colored Sun?

Brenon Daly

Contact: Brenon Daly

Just two days after Cisco took the fight to its longtime allies in the server wars, IBM is now looking to buy some ammunition of its own. Big Blue is reportedly mulling a $6.5bn bid for Sun Microsystems, according to The Wall Street Journal. The deal would be the largest tech transaction (excluding telecom M&A) since Hewlett-Packard jabbed at IBM’s giant services division, paying $13.9bn for EDS last May. If it comes to pass, a pairing of IBM and Sun would also radically change the battle lines in the broader fight to build out datacenters, specifically around server, storage and software offerings.

Take the server market. If the deal goes through, a combined IBM-Sun would dominate the high-end, RISC-based, Unix-based symmetrical multiprocessor server market, leaving HP a distant third. However, one point that might pose a challenge for Big Blue is how long it would want to continue with Sun’s Sparc architecture, a direct clash with its own Power chips and System-p servers. Turning to storage, IBM is probably less excited about Sun’s assets in that market. Sun’s storage business has been languishing in the doldrums for years, despite Sun supporting it with its largest-ever acquisition, its mid-2005 purchase of StorageTek for $4.1bn in cash. Nonetheless, there are probably enough enterprise customers locked into Sun’s high-end, mainframe-centric tape business to interest Big Blue. And in software, IBM and Sun are both committed to open source, although we would add that they have slightly different models for monetizing their investments there.

Of course, there’s a chance that the reported talks may not result in a deal. However, we would note that Sun shares are behaving as if it will go through, soaring nearly 80% in early Wednesday afternoon trading to $8.80. That’s essentially where they were last September. That fact probably won’t be lost on Sun’s largest shareholder, Southeastern Asset Management. The activist investor, which has indicated that it talked with Sun to explore a possible sale of the company, among other steps to ‘maximize shareholder value,’ holds some 20% of Sun stock, according to its most-recent SEC filing.