Category: technology stocks

Silver Lake’s two very different elephants

Brenon Daly

Contact: Brenon Daly

Silver Lake has placed its bet, and it’s a big one. As noted, the planned $24.4bn take-private of Dell is the largest tech leveraged buyout (LBO) since the end of the recession. It’s also twice the price of Silver Lake’s previous mega-LBO, the $11.3bn club deal for SunGard Data Systems.

As we look at the two mammoth transactions, they don’t line up very closely at all. For starters, they belong to different eras: SunGard was an early, prelapsarian private equity (PE) transaction, while Dell comes as the credit markets have only recently returned to health after the worst economic recession in several generations.

Further, the two companies find themselves exiting the public market with very different outlooks for their business. SunGard has been riding the steady trend of business services, while Dell has been taking steps to catch emerging trends but still relies on PC sales for more than half its revenue.

The separation between the pair of companies is clear when we look at their financials: Unlike Dell, SunGard was growing at the time of its LBO, not to mention the fact that it ran at a 28% EBITDA margin compared with about 8% at Dell. (SunGard also got valued at twice the price-to-EBITDA multiple that terms give to Dell.)

Finally, we would note that since the Silver Lake-led LBO, SunGard has acquired some 45 companies. The steady M&A, along with organic growth, has seen SunGard bump its top line from about $3bn when it went private eight years ago to about $4.5bn now. We highly doubt that Dell will put up that kind of performance, at least not right away. There’s a lot of work to do at Dell.

For more real-time information on tech M&A, follow us on Twitter @MAKnowledgebase.

Once indelibly on the market, Dell looks to go private

Brenon Daly

Contact: Brenon Daly

In the third-largest tech leveraged buyout (LBO), Dell will end a quarter century as a public company in a $24bn take-private led by Silver Lake Partners. The private equity firm will be joined by Michael Dell, who is maintaining a significant minority stake in the company that he will continue to lead once it goes private. The LBO comes after Dell has struggled for much of the past half-decade to recast its business away from the rapidly diminishing PC market.

As part of that shift, Michael Dell returned as CEO to his namesake firm in early 2007 and (somewhat belatedly) began an M&A spree that eventually totaled some 20 transactions with a tab of $10bn. The acquisitions got Dell into virtually every part of the tech landscape, including IT services (Perot Systems), security (SecureWorks, SonicWALL), networking (Force10 Networks), storage (Compellent, AppAssure) and infrastructure software (Quest Software).

However, the acquisitions and other strategic shifts that Dell has made have yet to show up in the company’s financials. Dell, which just wrapped its fiscal year, is likely to post revenue that’s nearly 10% lower than the previous year. The company’s operating income has dropped by about one-third.

Since Michael Dell returned to the corner office six years ago, shares of the company have lost about half their value. Rightly or wrongly, Wall Street still views Dell – which gets half its revenue from PC sales – as a low-value ‘box maker’ rather than a strategic supplier of IT products and services. In the end, Dell is exiting the market at just one-quarter the value it once commanded.

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Oracle sets its sights on networking, reaches for Acme Packet

Brenon Daly

Contact: Brenon Daly

After consolidating huge swaths of the software landscape, Oracle has turned its attention to networking with a landmark acquisition. The company will hand over about $2bn in cash for Acme Packet, which Oracle hopes will allow it to capture more business with service providers and enterprises as networks look to deal with higher-level traffic like voice and video in which Acme specializes. Acme – which gets about three-quarters of its revenue from product sales and the remaining one-quarter from maintenance and support – counts about 1,900 service providers and enterprises as customers.

However, Acme has run into difficulties recently. Sales dropped almost 10% through the first three quarters of 2012, and the company has found itself running in the red after years of profitable operations. Before Oracle’s bid, Acme shares had dropped more than 20% over the previous year, underperforming nearly all of the company’s beaten-down networking rivals. Even reflecting the premium, Oracle is acquiring Acme at just half the level that Acme commanded on its own as recently as mid-2011.

Not that Acme is ending its six-and-half-year run as a public company on the cheap. Oracle will hand over $29.25 for each share of Acme, or an enterprise value of $1.7bn. That works out to 5.9x Acme’s trailing sales, which is roughly inline with most of Oracle’s other big-ticket purchases. However, we would note that the 5.9x valuation is more than twice the median valuation for the 50 largest transactions over the previous year, according to The 451 M&A KnowledgeBase.

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The ‘fiscal cliff’ hangover

Ben Kolada

Contact: Ben Kolada

Talks of a ‘fiscal cliff’ and potential changes in capital gains taxes spurred company executives and their bankers into action in the final hours of 2012. In a way, that anxiety spilled over into the beginning of this year when we saw a flurry of acquisition announcements in the first few weeks of January.

However, many of the announcements in early January were deals that closed in December. Throughout the month, we saw a continuation of the downward trend in deal volume. On the heels of a 6% decline in total deal volume for full-year 2012, the total number of transactions announced in January 2013 dropped 15% from the year-ago period. It was the fewest number of announcements in the first month of a year since the recession year of 2009.

Contributing to the slowdown in M&A activity is the fact that, according to the US Department of Commerce, the US GDP shrank 0.1% in the fourth quarter (though that number is subject to revision). Although many consider the dip a one-time slump due to declining government spending, much of the tech industry is struggling to find any growth.

In a survey conducted at the end of 2012 by ChangeWave Research, a service of 451 Research, 26% of respondents expected their IT spending to decline in the first quarter of 2013 – a full 10 percentage points higher than the level of respondents who projected increased IT spending in the quarter.

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Sierra Wireless sells AirCard business to NETGEAR for $138m

Contact: Tejas Venkatesh

NETGEAR is acquiring Sierra Wireless’ AirCard business for $138m in cash, adding external modems that it will sell to mobile network operators such as Sprint and AT&T. AirCard modems plug into PC Card slots or USB ports in laptops and other electronic devices to help them connect to the Internet through cell phone networks. NETGEAR will use its global distribution capabilities to increase sales of AirCard products in emerging markets, while allowing Sierra to focus on machine-to-machine (M2M) connectivity for the ‘Internet of things’ future.

The AirCard business generated revenue of $247m in 2012, giving the deal a valuation of 0.6x trailing sales. The ho-hum valuation reflects the low-margin profile of the business as well as declining sales. According to Sierra’s regulatory filings, the AirCard business has shrunk every year since 2008, when it generated revenue of $409m. However, most of the future growth lies in parts of the emerging markets, where cell phone networks are the only way to access the Internet, due to a lack of wired infrastructure.

In its conference call, Sierra made clear that it intends to deploy the proceeds from the sale toward M2M acquisitions. That is consistent with the direction of its previous M&A activity. In December 2008, Sierra acquired Wavecom for $277m for its GSM/GPRS, CDMA, EDGE and 3G Wireless CPUs. More recently, last June Sierra purchased Sagemcom’s M2M business for $56m, adding 2G, 3G, GPRS and EDGE wireless semiconductors.

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Cisco acquires Israeli startup Intucell for $475m

Contact: Tejas Venkatesh

Cisco Systems has announced the acquisition of Israeli startup Intucell, paying $475m in cash and retention-based incentives for the startup’s self-optimizing network software. The deal is consistent with Cisco’s recent direction, in which it wants to provide more valuable offerings to service providers in addition to basic networking capability. The networking giant is paying a handsome multiple for the five-year-old target. (Subscribers to The 451 M&A KnowledgeBase can click here to see our official estimate on terms of the transaction.) The exit is a big moneymaker for Bessemer Venture Partners, which provided $6m in funding for almost half of Intucell’s equity.

Intucell’s software helps carriers optimize their networks in real time by analyzing data from cellular grids. Using operational support systems data, it can detect when a cell tower is overloaded and loop in assistance from nearby towers, thereby responding to unpredictable mobile traffic and improving network quality. AT&T was an early Intucell customer.

Cisco’s last three acquisitions have been aimed at service providers. In November, it bought Cariden Technologies for $141m, adding capacity-planning and management tools for IP and optical networks. And in December, Cisco followed up with the purchase of Broadhop for its policy control and service management technology.

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Violin does a bit of portfolio roundout ahead of expected IPO

Brenon Daly

Contact: Simon Robinson, Brenon Daly

Violin Memory has made a technology-and-talent play, adding GridIron Systems in what’s likely to be the last bit of portfolio roundout before the flash-based storage specialist goes public. The purchase of GridIron is part of Violin’s strategy to maximize its addressable market in the emerging solid-state storage space, and specifically allows it to accelerate the performance of applications residing on existing SAN storage systems at large enterprises and service providers.

Violin didn’t disclose how much it paid for GridIron but we have heard from market sources that it wasn’t much money. As we understand it, GridIron was heading toward a wind-down and Violin is merely picking up some key IP and personnel from the company. The target’s website has only a skeletal list of executives, without a CEO or CFO. A year ago, GridIron indicated that it had some 50 employees, but Violin is expected to take on less than half that number. We’ll have a full report on the transaction in our next Daily 451.

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CyrusOne’s steady rise

Ben Kolada

Contact: Tejas Venkatesh, Ben Kolada

CyrusOne, the colocation bull that has now changed hands three times since 2007, debuted on the Nasdaq today with a valuation topping $1bn. The fast-growing company was spun off of Cincinnati Bell but is still majority owned (72%) by the regional telco. Shares popped during early trading, continuing the company’s history of creating considerable wealth for each of its owners.

The datacenter company, which is structured as a real estate investment trust, sold 16.5 million shares at $19 per share, higher than its previously guided $16-18 range. The IPO raised a total of $313.5m, though underwriters have an option to sell an additional 2.5 million shares. Shares jumped approximately 10% when they hit the Nasdaq and held the gains through midday trading. CyrusOne currently sports a market cap of about $1.3bn.

CyrusOne operates 24 facilities, primarily in the Ohio and Texas markets. The company offers colocation services aimed at enterprise-class customers requiring highly available facilities, engineered for dense power and reliability. Morgan Stanley and Bank of America Merrill Lynch were joint bookrunners for its IPO.

This is the third time shares of CyrusOne have traded hands since 2007. And in each transaction, its value has steadily climbed, creating considerable wealth for each of its owners.

CyrusOne’s rising valuation

Date Liquidity event Valuation
January 18, 2013 IPO $1.3bn
May 12, 2010 Sale to Cincinnati Bell $525m
July 11, 2007 Sale to ABRY Partners $130m

Source: The 451 M&A KnowledgeBase

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Telcos playing a new hosting game

Ben Kolada

Contact: Ben Kolada

Datacenter operator Digital Realty Trust on Wednesday announced that it paid $80m for a three-property portfolio of datacenters from French telco Bouygues Telecom. The deal could signal yet another robust year in Internet infrastructure M&A, but also shows that telcos are playing different strategic cards in the ongoing hosting game.

Last year set a record in Internet infrastructure M&A deal volume with 110 acquisitions announced, according to The 451 M&A KnowledgeBase. The record is particularly notable as it comes at a time when telcos are weighing alternative options to acquiring hosting properties. With the exception of NTT Communications, which announced three hosting acquisitions last year, telcos have largely been out of the M&A arena.

In fact, as evidenced by Bouygues’ divestiture, telcos are now considering strategies other than buying or owning high-growth hosting businesses. For example, the Digital Realty-Bouygues deal is structured as a sale-leaseback transaction, in which datacenter specialist Digital Realty will own the facilities but Bouygues will lease and operate them. Other telcos, such as Cincinnati Bell, have also decided to pass their hosting facilities on to vendors more versed in the business. Cincinnati Bell is spinning off its CyrusOne hosting unit into a publicly traded entity. CyrusOne will debut on the Nasdaq tomorrow, planning to sell 16.5 million shares $16-18 each.

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Fortinet acquires CDN software startup XDN

Contact: Tejas Venkatesh

Unified threat management vendor Fortinet has acquired four-year-old startup XDN, adding software that is used for building and managing CDNs. The deal helps Fortinet closely tie its security and WAN optimization services with content acceleration software from XDN, thereby providing a distributed, cloud-based approach to adapt effectively to disruptive attack traffic.

Fortinet’s move comes as companies like Akamai have fortified their security lineups with cloud-based Web application firewall and other related services. Fortinet did not disclose terms of the deal. In fact, it was XDN that announced the transaction in a blog post, almost a month after my colleague Jim Davis wrote about the deal. XDN raised about $7m in funding from Storm Ventures and Canaan Partners. For a full report on the acquisition, click here.

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