Category: technology stocks

Gigamon eyes IPO even as a market stalls

Brenon Daly

Contact: Brenon Daly

Despite the crosscurrents in the IPO market, Gigamon has put in its paperwork for a planned $100m offering. The network traffic management vendor runs solidly in the black and has been increasing revenue at about a 50% clip in recent years. It finished 2011 with revenue of $68m and, assuming its growth rate continues, will wrap this year at roughly $100m. (Most of the revenue – between two-thirds and three-quarters of overall sales – comes from products, with associated services generating the remainder.)

Eight-year-old Gigamon competes with network heavyweights such as Cisco Systems and Juniper Networks, while a number of other companies have acquired technology that makes them rivals as well. Just in the past two months, Ixia paid $145m for Anue Systems while Danaher added VSS Monitoring. (Subscribers to 451 Research can see our full report on the transaction, including our estimate of the undisclosed terms.)

The proposed offering from Gigamon comes at a time when the IPO market is still struggling to find its footing: On the same day Gigamon put in its S-1, MobiTV withdrew its. And while the market should get a bit hotter this week with the expected debut of Palo Alto Networks, many investors are still underwater on their Facebook shares. The IPO of the fast-growing social networking firm was supposed to serve as a catalyst for the market, but instead deteriorated into a mishandled offering that has sparked lawsuits and losses.

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A tale of two IPO markets as Palo Alto Networks and Kayak hit the road

Brenon Daly

Contact: Brenon Daly

To understand the relative health of consumer and enterprise IPOs in the aftermath of the Facebook offering, consider the rather stark contrast between KAYAK.com and Palo Alto Networks. Both technology vendors set terms for next week’s debuts on Monday, but only enterprise-focused Palo Alto can expect to run with the bulls.

For starters, take a look at the gestation period for each of the offerings. Palo Alto set its range in only its third amendment to its S-1, which it filed just three months ago. (For the record, Palo Alto plans to sell 6.2 million shares at $34-37 each). In contrast, KAYAK’s paperwork has a lot of dust on it. The online travel site originally filed in November 2010 and set its range in its 12th update to its S-1. (For its part, KAYAK intends to sell 3.5 million shares at $22-25 each.)

But the contrast will come out even more sharply in terms of valuation. Although the companies are roughly the same size (Palo Alto did $220m in trailing 12-month (TTM) revenue, compared with $245m in TTM revenue for KAYAK), Palo Alto is more than doubling sales each quarter while KAYAK is posting growth in the mid-30% range.

Wall Street always awards fast-growing companies a premium, but the gap between these two offerings is substantial. Assuming both Palo Alto and KAYAK come to market at the high end of their expected price ranges, the security vendor will begin life with a market cap of about $2.5bn while the online travel site will start life as a public company at a valuation of roughly $1bn. That means Palo Alto will be valued at more than 11 times TTM sales, while KAYAK will garner just 4x TTM sales.

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Cypress squeezes a bit hard in its bear hug

Contact:  Thejeswi Venkatesh, Ben Kolada

Having increased its offer to buy rival Ramtron International once already, Cypress Semiconductor may have to get ready to do so again. Ramtron’s board unanimously rejected Cypress’s latest bid of $2.68 per share, claiming the deal undervalued the company. Investors continue to agree with Ramtron. Shares of the Colorado Springs, Colorado-based company have consistently traded above Cypress’s unsolicited offer, closing at $3.08 Thursday. That’s about 15% higher than the raised bid.

Cypress’s new offer values Ramtron at 1.4 times trailing sales, only a smidgen above the 1.3 times valuation Ramtron received in Cypress’ initial bid. In comparison, Cypress’s revised offer is also far below its own valuation of about 2.2x trailing revenue.

If Cypress doesn’t come up with a topping bid, it risks losing Ramtron to a competitor. There are already other obvious suitors – most notably STMicroelectronics and Atmel – that have shown both the ability and willingness to make sizable acquisitions. STM ended the March quarter with $1.9bn in cash on its balance sheet while Atmel ended it with $299m. In February 2008, Atmel bought microcontroller designer Quantum Research Group for $88m while STM’s biggest deal to date was its purchase in April 2008 of NXP Semiconductors’ wireless semiconductor business for $1.5bn.

Micron acquires bankrupt Elpida to consolidate DRAM market

Contact: Thejeswi Venkatesh, John Abbott

Micron Technology on Monday announced its largest acquisition – the $2.5bn purchase of Japanese rival Elpida Memory. The announcement comes five months after Elpida filed for bankruptcy, with a whopping $5.6bn of debt on its balance sheet. Under terms of the agreement, Micron will pay $750m for all of Elpida’s equity and $1.75bn over seven years in interest-free installments to the firm’s creditors.

Micron hopes that its consolidation move will help stabilize DRAM supply, while also strengthening its product reach into new areas. In particular, it will be targeting mobile DRAM for smartphones and tablets, which command higher market prices. Elpida has a strong product portfolio in this area and is a key supplier for Apple.

The industry-wide decline in prices due to oversupply has troubled all DRAM players, including Elpida. But Micron’s DRAM unit has fared better than most. While Elpida suffered a $1.2bn loss on $4bn in sales in 2011, Micron’s DRAM unit generated a profit of $290m on $3.2bn in sales.

The combined company will create the second-largest DRAM player, behind only Samsung, but ahead of number three player SK Hynix. By Micron’s calculations, these three vendors will control up to 90% of the $30bn memory chip market. Most of the remaining 10% is held by three smaller Taiwanese players: Nanya Technology (owned by Formosa Plastics), ProMOS Technology and Winbond Electronics. All of these smaller companies are currently losing money. Micron already holds a 40% stake in another struggling player, Inotera Memories, in which Nanya also holds a 26% stake.

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U-Blox acquires Cognovo in LTE chip push

Contact: Thejeswi Venkatesh

U-Blox has announced the acquisition of UK-based software-defined-modem designer Cognovo for $16.5m in cash. Switzerland-based U-Blox, best known for designing GPS receiver modules, will combine baseband chip technology from Cognovo with the 4G stack from 4M Wireless, a company it bought in April for $9m. The combined technology will further its push toward gaining market share in LTE chips. Growthpoint Technology Partners advised Cognovo.

Cognovo was founded in early 2009 and is based in Cambridge. Shortly after its founding, chip giant ARM Holdings handed over its Vector Signal Processor (VSP) technology to Cognovo in exchange for a 15% equity stake in the company. ARM also provided convertible debt financing to Cognovo and held a seat on the target’s board.

In recent months, the explosion in smartphones has set off a race for spectrum that has resulted in the fragmentation of frequency bands and wireless technologies. Each band requires specific chip and antenna support, making it difficult for phone manufacturers like Apple and Samsung to support all bands without compromising on cost and performance.

Cognovo helps overcome this problem by defining wireless modem functionality in the form of a software program that is independent of hardware design. To help meet mobile phone power-consumption requirements, Cognovo uses VSP, which provides an architecture and instruction set that is optimized for wireless algorithms.

The (bargain) quest for Quest

Brenon Daly

Contact: Brenon Daly

Nobody wants you, then everyone wants you. In the year leading up to the proposed management buyout of Quest Software in early March, shares of the management software vendor had shed one-quarter of their value. (At one point in its slide last August, the stock dipped to $15 – its lowest point in two years.)

The ongoing bidding war, of course, has changed all that. Since sinking to its low-water mark last summer, Quest’s valuation has risen a cool $1bn, with an unidentified suitor (widely assumed to be Dell) bidding about $2.4bn for the old-line software company on Monday. The latest offer is $27.50 per share, some 20% higher than the $23 per share offered by Insight Venture Partners back in early March. Just to put some context around the price, Quest stock hasn’t changed hands above $30 in 11 years.

And yet, even with the four rounds of bumped bids, Quest is still trading slightly below the median valuation of significant acquisitions so far this year. According to The 451 M&A KnowledgeBase, the 50 largest transactions in 2012 have gone off at 3 times trailing sales. The latest bid for Quest values the company at 2.7 time trailing sales.

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The IPO machine is back in ServiceNow

Brenon Daly

Contact: Brenon Daly

The Wall Street machine is primed to churn out its next new technology public company, as ServiceNow gets set to debut next week. Sure, the gears of the machine got jammed up a bit in the last offering (Facebook shares are still under water), but it should be humming again with the IPO of the on-demand helpdesk vendor.

Eight-year-old ServiceNow will almost assuredly create more than $2bn in market value overnight and, we suspect, restore the way an IPO is ‘supposed’ to work. (Well, let us qualify that last point: Wall Street speculators – which is how we characterize people who play IPOs, rather than invest in a company for the long term – simply expect new offerings to be priced to pop. And when the shares don’t, well, they dump and run, as Zuckerberg & Co. learned firsthand.)

But we don’t expect any ‘Facebook hangover’ for the ServiceNow IPO. The reason? The company is not only growing solidly (nearly doubling revenue), but is also generating relatively predictable growth, with long-term annual contracts (averaging 2.5 years) and renewal rates that run at almost 100%.

Unlike Facebook, ServiceNow also has the advantage that it is selling into a well-established market, although it is approaching it in a disruptive way. (Meanwhile, the existing IT systems management giants are suffering through tough times: Mercury Interactive has all but disappeared inside a reeling Hewlett-Packard, while BMC has attracted the unwelcome attention of a hedge fund for the company’s ‘underperformance.’)

And finally, there’s the matter of who’s running the two companies and their respective relationship with the would-be buyers of their stock. At Facebook, CEO Mark Zuckerberg couldn’t be bothered to meet with Wall Street investors during much of the roadshow. On the other hand, ServiceNow CEO Frank Slootman made investors a boatload of money on the last company he took public. He steered Data Domain through its IPO in 2007 and then sold the data de-duplication vendor two years later for roughly three times the value it came public at.

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

What’s a Smarsh to do?

Ben Kolada

Contact: Ben Kolada

Depending on which way the bidding goes for systems management vendor Quest Software, Smarsh’s future could change considerably. The compliance-focused archiving startup announced in February that it sold a majority of its equity to Quest, just three weeks before its newfound parent became the center of an ongoing bidding war. But one side’s plans for Quest post-close may not include Smarsh.

After the closing bell Tuesday, Vector Capital joined Insight Venture Partners and Quest’s management in announcing that they had increased their offer for Quest to $25.75 per share, for a total deal value of about $2.24bn by our calculations. The revised bid tops a competing offer from an unidentified suitor – widely believed to be Dell – that was announced last week.

While all eyes are on Quest at the moment, the continued bidding casts a shadow over who will ultimately own Smarsh. Right now, the company is seen as more of a Quest investment rather than an operating business unit.

If Insight and the rest ultimately win Quest, Smarsh could be considered just another portfolio company for the private equity firms. However, if that unidentified bidder is Dell, and Dell ultimately wins, Smarsh could soon be cast off, since Dell already offers archiving products competitive to Smarsh. In 2008, Dell acquired MessageOne – a direct rival to Smarsh – for a whopping $155m. Dell also has its own archive storage system, the DX platform, based on software OEMed from Caringo. (However, we’d note that neither of these initiatives seems to have gone too far yet.)

Rather than worry about would could happen in the future, Smarsh is keeping itself busy in the present. The company has announced two acquisitions in the past month. In May, Smarsh bought Web content-archiving vendor Perpetually.com and on Tuesday it announced the purchase of compliance-focused website hoster AdvisorSquare, which targets the finance vertical. The deals should ramp up the company’s growth rate for 2012 and 2013. We estimate that Smarsh generated $20m in revenue last year, or about 30% year-over-year top-line growth.

Timeline

Date Event
February 14, 2012 Quest Software acquires 60% stake in Smarsh.
March 9 Insight Venture Partners and Quest management offer to buy Quest for $2bn.
May 16 Smarsh picks up Perpetually.com.
June 14 Unidentified bidder offers approximately $2.22bn for Quest.
June 18 Smarsh acquires AdvisorSquare from Symantec.
June 19 Vector Capital joins Insight and Quest management to buy Quest for approximately $2.24bn.

Source: The 451 M&A KnowledgeBase

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

Qualcomm scales power management with Summit Micro buy

Contact: Ben Kolada, Thejeswi Venkatesh

Adding to its power management product portfolio, semiconductor giant Qualcomm announced on Monday the acquisition of Summit Microelectronics, a designer of programmable power management and battery-charging semiconductors. The deal is meant to help Qualcomm further target increasing demand for battery management on smart devices.

Neither Qualcomm nor Summit disclosed terms of the transaction, but in March Summit issued a press release claiming that it hit record revenue and profits in 2011, and that fourth-quarter 2011 revenue doubled from the prior-year period. However, that alone shouldn’t impress too much. The company had to raise several rounds of funding throughout its 15-year lifetime to bring its products to market. While most venture-backed companies typically continue to fundraise only through to maybe a fourth, or D, round, Summit’s messy fundraising history continued at least through to an H round.

The acquisition is yet another step in feeding the demand for managing power on an ever-evolving group of power-intensive devices. As consumer electronics continue to advance, particularly in regard to HPC capabilities and high-resolution screens, battery management is becoming increasingly critical. In announcing the deal, Qualcomm points directly at this demand, noting that Summit’s chips are found in a variety of mobile phones, tablets and e-readers.

Cypress Semiconductor returns to M&A

Contact: Thejeswi Venkatesh

After staying out of the M&A market for four years, Cypress Semiconductor stepped back in earlier this week with an $87.6m unsolicited cash bid for ferroelectric RAM designer Ramtron International. However, this isn’t the first time that Cypress has tried to acquire its smaller rival. Cypress revealed that it tried to buy Ramtron’s equity last year for approximately the same amount, an offer the company flatly declined.

Cypress’ bear hug comes at a time when Ramtron has struggled to increase its business under existing management. Last year, the company generated sales of $66m, virtually unchanged from 2008. For its part, Cypress has seen its revenue increase at a healthy rate, going from $765m in 2008 to $995m in 2011. Cypress, which has asked Ramtron to respond to its offer by next week, has engaged Greenhill & Co as financial adviser while Needham & Co will advise Ramtron.

On its return to M&A, Cypress is focusing on a business it knows well: memory chips. The company has a blemished history in trying to expand its product offering through inorganic means. For instance, Cypress divested SMal Camera Technologies in 2007 for $11.4m, approximately one-quarter the $42.5m it paid for the company just two years earlier. Similarly, Cypress acquired FillFactory for $100m in the summer of 2004 but sold the division to ON Semiconductor in early 2011 for a mere $31.4m.

Select Cypress M&A

Date announced Target Deal value Focus
August 1, 2008 Simtek $46m High-speed memory chips
February 14, 2005 SMaL Camera Technologies $42.5m CMOS image sensor ICs
June 22, 2004 FillFactory $100m CMOS image sensors
October 20, 2003 Cascade Semiconductor $9.4m Memory semiconductor design
April 10, 2003 Micron (SRAM unit) Not disclosed Synchronous SRAM
January 08, 2002 Silicon Packets $24.5m 10Gbps framers

Source: The 451 M&A KnowledgeBase