Category: storage

Post-acquisition decapitation

Brenon Daly

The write-offs from wrong-headed acquisitions just keep coming. And we don’t mean just financial write-offs. Instead, we’re referring to the practice of a company’s board ‘writing off’ the executives who crafted a deal. This week’s high-profile example came when Alcatel-Lucent finally tossed overboard the two architects of ‘la grande fusion.’ Since that deal was announced in April 2006, the combination has incinerated some $20bn over shareholder value, leaving the telco equipment vendor with a market capitalization of just $13.6bn. (That’s less than the sales the company posted in 2007.) That two-year performance finally got Serge Tchuruk, the company’s chairman who represents the Alcatel side of the combination, and Patricia Russo, the Lucent legacy, shown the door.

This house-cleaning at Acaltel-Lucent comes just two weeks after AMD kicked Hector Ruiz upstairs. In virtually the same breath that AMD announced Ruiz would be relieved of his CEO post but continue as chairman, the company said it will divest much of the business it picked up with its $5.4bn purchase of graphics chip maker ATI Technologies. Announcing the deal two years ago, Ruiz said his combination offered ‘limitless’ possibilities for innovation. Instead, the future of AMD looks rather limited, in large part because of the $2.5bn it borrowed to cover its disastrous purchase of ATI. AMD’s total debt stands at $5bn, compared with just $1.6bn in cash.

Meanwhile, a chief executive who we’ve always thought must be on the hot-seat for a misguided acquisition appears to have gotten a bit of a reprieve this week. Symantec CEO John Thompson said Wednesday that fiscal first-quarter sales of its backup products outpaced overall revenue growth. That reverses the recent weakness in the company’s storage offering, which Symantec acquired with its $13.5bn purchase of Veritas in December 2004. Wall Street applauded the company’s report, with shares up about 10% since Wednesday. Still, Thompson has yet to recognize much value from the three-and-half-year-old purchase of Veritas. Symantec shares, which changed hands at $21.74 midday on Friday, are still about $6 below where they were when the company picked up Veritas. Perhaps that goes some distance to explaining the loose rumors this week that something big – possibly the much-discussed divestiture of the storage business or even an outright sale of the company – was brewing at Symantec.

Leading the acquisition

Deal Stock performance since deal Status of acquiring company CEO since deal
Symantec-Veritas, Dec. 2004 Down 35% John Thompson, CEO since April 1999, continues to serve
Alcatel-Lucent, April 2006 Down 61% CEO Russo and chairman Tchuruk ousted this week
AMD-ATI, July 2006 Down 77% Long-time CEO Hector Ruiz replaced in mid-July
Secure Computing-CipherTrust, July 2006 Down 51% Chairman and CEO John McNulty replaced in April

Source: Company reports, The 451 M&A KnowledgeBase

Cisco’s M&A machine unplugged

Brenon Daly1 Comment

While Brocade Communications has used its $3bn purchase of Foundry Networks to turn up the pressure on Cisco Systems, we would quickly add that Cisco itself has hardly used M&A at all this year. Typically one of the busiest corporate acquirers, Cisco has averaged about a deal per month in recent years. However, so far this year, the networking giant has acquired just one company, DiviTech. (In addition to last month’s purchase of the tiny Danish company, the only other announced move in 2008 was snapping up the 20% stake in its subsidiary Nuova Systems that it didn’t already own.)

Earlier this year, we noted that Cisco was rumored to be making a run at Citrix. Although that speculation initially helped boost Citrix shares, they have since sunk to a 52-week low. The decline over the past three months has shaved a half-billion dollars off Citrix’s market capitalization, representing a decent ‘rebate’ for any acquirer of the infrastructure software vendor. It currently sports a $5bn market capitalization. In the past, Cisco has shown itself ready to seal multibillion-dollar deals, including its $6.9bn purchase of Scientific-Atlanta in late 2005 and its $3.2bn acquisition of WebEx Communications in March 2007. Cisco is slated to report its fiscal 2008 results in two weeks.

 Cisco’s disappearing deals

Period Deal volume Deal value Notable acquisitions
Jan. 1 – July 21, 2005 7 $899m FineGround Networks, Airespace, Topspin Communications
Jan. 1 – July 21, 2006 4 $143m Meetinghouse Data Communications, SyPixx Networks
Jan. 1 – July 21, 2007 9 $4.2bn WebEx Communications, IronPort Systems, Neopath Networks
Jan. 1 – July 21, 2008 1 undisclosed DiviTech

Source: The 451 M&A KnowledgeBase

Proofpoint buys Fortiva, expands into email archiving

After a courtship that lasted the better part of a year, on-demand security provider Proofpoint finally picked up software-as-a-service email archiving startup Fortiva this week. Based on similar transactions and industry buzz, we estimate this tuck-in acquisition cost Proofpoint somewhere in the neighborhood of $70m. Fortiva, which has 45 employees, was running at about $15-20m in revenue from about 200 enterprise customers. This marks a solid exit for the company’s venture backers, Cargill Ventures, Ventures West and McLean Watson Capital, which only pumped $8m into Fortiva.

The interesting question sparked by this transaction is what’s next for Proofpoint, which is now up to 250 employees. Though some have suggested the company has now effectively dressed itself up as an acquisition target, we believe otherwise. We think an IPO will represent the next major milestone for the company. (In wrap-up of April’s RSA conference, we said as much, adding that an acquisition by Proofpoint was likely in the next few months.)

Proofpoint has drawn in some $86m in funding since its inception in 2002, including a $28m round in February, even though it was running at close to breakeven. With more than 1,600 customers, bookings are up 70% on a year-over-year basis for 2008. The growth comes despite stiff competition. Google, Cisco and Autonomy Corp made a big push into the market last year with their respective acquisitions of Postini, IronPort Systems and Zantaz.

Yet, Proofpoint has held its own against these larger vendors, even recruiting a few high-ranking employees from Postini, we’ve heard. Speaking of hiring at Proofpoint, we would also highlight last year’s move to bring Paul Auvil on board as CFO. Auvil served as the top numbers guy at VMware, guiding that company from the tens of millions of dollars in revenue to hundreds of millions of dollars. Of course, that company never made it fully public. We have a feeling Auvil may yet have a chance to be CFO at a public company, given the direction of Proofpoint.

Select on-demand security deals

Announced Acquirer Target Deal value Target revenue
July 9, 2007 Google Postini $625m $70m*
July 3, 2007 Autonomy Zantaz $375m Not available
May 14, 2007 Verizon Business Cybertrust $450m* $225m*
April 26, 2007 Websense SurfControl $400m $220m
Jan. 4, 2007 Cisco IronPort $830m $100m*
May 19, 2004 Symantec Brightmail $370m $26m

Source: The 451 M&A KnowledgeBase, * official 451 Group estimates

Captive deal

Brenon Daly1 Comment

For many startups, the deeper a partnership is, the shallower the pool of potential acquirers. Consider the case of SwapDrive and this week’s quiet sale to Symantec. The two sides inked an OEM agreement nearly two years ago – a bit of paperwork that turned out to be a precursor to an M&A contract. With Symantec likely accounting for a majority of sales at SwapDrive, a trade sale seemed the realistic exit for SwapDrive. That became even more likely as sales of Norton 360, which is based on the technology supplied by SwapDrive, outstripped Symantec’s early projections, according to our understanding. The Norton 360/SwapDrive offering targets the consumer market, which complements the company’s enterprise-focused Symantec Protection Network.

However, perhaps because it was essentially a captive deal, SwapDrive ended up getting taken out at a significant discount to its rival Berkeley Data Systems. Just half a year ago EMC shelled out $76m for Berkeley Data, which runs the Mozy service. We understand Mozy generated about $8m in sales in the year leading up to the sale, meaning EMC paid 9.5 times sales for the online backup startup. In contrast, SwapDrive went for 5.6 times trailing sales. According to reports, Symantec paid $123m for SwapDrive, which was running at $22m.

Symantec’s purchase of SwapDrive continues a run of larger storage players snagging online backup vendors. The earlier deals – inked by Iron Mountain and Seagate Technology – got done at multiples closer to Symantec-SwapDrive, although the market has heated up a bit since those first combinations. We wonder what that will mean for the last remaining online backup vendor of note: Carbonite Inc. The company took in $20m in its series B in February and has indicated it’s looking for an IPO late next year. Who knows, maybe the window will be open by then. 

Selected online backup deals

Acquirer Target Date Price Target revenue
Symantec SwapDrive June 2008 $123m* $22m*
EMC Berkeley Data Systems [Mozy] Oct. 2007 $76m* $8m*
Seagate EVault Dec. 2006 $185m $35m*
Iron Mountain LiveVault Dec. 2005 $42m $10m

*estimated, Source: The 451 M&A KnowledgeBase

Big Yellow’s purple elephant

Brenon Daly

Asked not too long ago to explain the slump in Symantec’s stock since acquiring Veritas three years ago, CEO John Thompson memorably called the combined company ‘a purple elephant.’ The allegorical description was a bit of a departure for the straight-laced, straight-talking ex-Big Blue executive, who went on to add that since Wall Street had never seen such a large security-storage company, it didn’t know how to value it. (Generally speaking, however, investors have known how to value it: lower. Since announcing the $13.5bn acquisition in December 2004, Symantec shares have shed about 22% of their value, compared to a 15% gain in the Nasdaq over that same time.)

The purple elephant has turned into a bit of a sacred cow, with Thompson defending the combination at every turn and forcefully knocking down any suggestion that Symantec should shed some of the Veritas assets. (Of course, Symantec already ditched Precise – an application performance management product that it inherited from Veritas – back in January.) Talk of possible divestitures surfaced last week following a research note from Cowen and Co analyst Walter Pritchard, who speculated that NetBackup and Data Center Foundation, a storage and server management product, may find their way onto the auction block. Not so, countered Thompson on Symantec’s first-quarter earnings call last Wednesday. The company has ‘no plans to divest anything – none.’ A senior corporate development guy at a company named as one of the possible buyers of the Foundation business told us recently that he hasn’t even been informally approached to gauge the company’s possible interest in Foundation, much less seen a book on the possible asset sale.

Of course, M&A is cyclical, to some degree tracking the overall economy. And we know this about dealmaking in a recession: When times get tight, ties get thin. We’ve already seen that most dramatically in the private equity world, whether it’s former buyout buddies taking each other to court or banks looking to get out of their lending agreements they’ve already signed. That same thinking (‘maybe we shouldn’t have done…’) is now hitting the C-suite. Consider the ongoing sell-a-thon at Time Warner, with the company planning to split off its cable services business, and, we speculate, finally putting AOL’s core US access business on the block. Or, there’s eBay entertaining the idea of jettisoning Skype Technologies, after writing down basically half of the $2.6bn purchase price. Or, if current reports are to be believed, Sprint Nextel may unwind the $39bn acquisition that has soured into a money-burning debacle. Although Thompson says Symantec isn’t a seller, this is clearly the climate in which companies are being pushed to reexamine their acquisitions. That could very well mean taking the knife to the purple elephant again.

Reversing deal flow

Company Assets Comment
Symantec NetBackup, Data Center Foundation, according to rumors Symantec says it’s not looking to sell.
Time Warner Cable services business, and (we speculate) AOL’s US access unit AOL has already shed ISP businesses overseas.
eBay Skype Technologies New CEO says next few quarters will determine if company keeps its overpriced acquisition.
Sprint Nextel Nextel WSJ reports this week that Sprint may unwind Nextel deal, and look to sell itself.
VeriSign Numerous units picked up in 20-company shopping spree VeriSign has already divested three businesses this year.