Category: technology stocks

More of the same at SuccessFactors under SAP

Brenon Daly

Contact: Brenon Daly

With the official closing today of SAP’s $3.6bn acquisition of SuccessFactors, it’ll be business as usual for the human capital management (HCM) vendor – starting at the top. Certainly the new ownership hasn’t throttled CEO Lars Dalgaard in the least. During his Wednesday luncheon keynote at the Pacific Crest Securities Emerging Technology Summit, Dalgaard was jarringly blunt, colorfully profane and wickedly insightful. In other words, same old Lars.

For instance, during his keynote he gave the flick to the more than 70 venture capitalists that he said passed on SuccessFactors when he was raising money back in the early part of last decade, and then rubbed that in by pointing out that the VC firms that did invest got a return of more than 4,000%. Similarly, in a video clip he played during his speech, Dalgaard noted that one of the more gratifying parts of the sale to SAP – the largest-ever SaaS deal, which valued SuccessFactors at its highest-ever price – was the fact that the acquisition ‘fried’ investors who had shorted SuccessFactors’ stock.

Dalgaard also indicated that even though his company is now owned by SAP, it will continue to be active in M&A. (On its own, SuccessFactors announced six acquisitions, after looking at some 140 companies, according to Dalgaard.) In fact, we understand that SuccessFactors will actually have an expanded corporate development role, taking on responsibility for cloud deals that would go beyond the HCM sector it focused on as a stand-alone company. That mirrors SAP’s decision to tap Dalgaard to run its overall cloud business

I/O virtualization sector consolidates

Contact: Thejeswi Venkatesh, John Abbott

Rumors are swirling that Fusion-io has acquired patents and key employees from Aprius, after the I/O virtualization vendor failed last year. I/O virtualization, which helps remove the I/O bottleneck from servers, frees up resources for datacenter users and simplifies configuration and cabling. The sector has seen a wave of consolidation and exits recently, indicating both the difficulty of surviving as independents and the importance of the technology for future generations of server infrastructure. First, it was 3Leaf systems, which announced its acquisition by Huawei in November 2010 – only to be blocked by pressure from the US government. Then, earlier this year, Micron announced the purchase of Virtensys.

That leaves NextIO and Xsigo Systems as the only surviving independent companies that have multiplatform products. Xsigo is the more successful of the two and has been expanding its scope into networking I/O territory. For its part, NextIO has indicated that it’s going strong establishing new OEM partnerships. However, given the level of activity in the sector, we wouldn’t be surprised if the two surviving players got acquired by existing strategic partners Dell or IBM. Other potential suitors include firms in the adapter space such as Emulex, Mellanox and QLogic.

Cable & Wireless Worldwide may lose independence

Ben Kolada

Contact: Ben Kolada, Thejeswi Venkatesh

Just two years after parent company Cable & Wireless Group split itself into two businesses, the consumer division Cable & Wireless and the business services unit Cable & Wireless Worldwide (CWW), CWW may once again find itself as part of a larger organization. Vodafone confirmed Monday that it is in talks regarding the possible acquisition of CWW. The deal, which is rumored to be valued at roughly $1bn, should be welcome news to CWW’s investors, who have seen the company’s stock plummet by two-thirds in the past year.

Independent CWW, which provides fixed lines that link to wireless transmitters and switches, among other voice and data services, has fared poorly since the split, as revenue flatlined and the company issued several profit warnings. However, exploding Internet usage on mobile phones has caused renewed interest in CWW. Vodafone, which is light on its fixed-line capacity in the UK, would likely use the acquisition to enable more bandwidth availability for its mobile users. Vodafone will be able to take advantage of CWW’s vast infrastructure to backhaul its own cellular services, rather than rely on third-party operators. CWW’s investors are hopeful that the deal will come to fruition, with shares of the telco closing the trading day 30% higher. Vodafone has until March 12 to make a decision on the acquisition.

Putting a premium on growth

Brenon Daly

Contact: Brenon Daly

Over just the past two months, the two largest stand-alone human capital management (HCM) providers have been gobbled up by two of the largest software vendors. Back in December, it was SAP reaching across the Atlantic for SuccessFactors, while just yesterday Oracle announced its plan to take home Taleo. Both of the software giants paid the highest-ever stock price for their HCM targets, which will serve as key components of their cloud strategies.

But the valuations – both on an absolute and a relative basis – are strikingly different, with SAP valuing its HCM property almost twice as richly as Oracle. The specifics: SAP is paying $3.6bn for SuccessFactors, which works out to more than 11 times trailing sales, while Oracle is handing over $2bn, or slightly more than 6x trailing sales, for Taleo.

Why the disparity in the pricing of the two comparable deals? Well, for all of their similarities, there is one crucial difference between SuccessFactors and Taleo. Last year, SuccessFactors increased revenue by about 60%, twice the rate of growth at Taleo in 2011.

Selling to Facebook

Ben Kolada

Contact: Ben Kolada

Rather than buy into Facebook after it debuts on the open market, many companies may consider selling to the social networking giant after its IPO. Facebook is already rich with cash, and is about to become much richer. Meanwhile, its M&A strategy has so far focused on acquiring smaller startups for their IP and engineering talent, but the company has said it may do bigger deals in the future.

According to The 451 M&A KnowledgeBase, Facebook has so far bought 25 companies, mostly for their specialized employees such as software engineers and product designers, but also for complementary technology. The company has been fairly cash conscious in its transactions, preferring to motivate acquired personnel with stock options rather than upfront cash payouts – in fact, Facebook spent just $24m in cash, net of cash acquired, on the deals it closed in 2011.

While innovative startups with skilled personnel, particularly those in the collaboration and social networking sectors, should still consider selling to Facebook a viable exit, midmarket and larger technology firms should also consider Facebook a potential suitor. In both public reports and in its IPO prospectus, the company has said it could put its treasury to work on larger deals. And it will certainly have the fire power – adding proceeds from its $5bn public offering to its treasury would bring its total spending power to nearly $9bn (including cash and marketable securities).

Facebook could apply some of its rationale for buying smaller vendors to larger acquisitions. For complementary technology, it could target a larger mobile advertising network (it picked up development-stage rel8tion in January 2011). The lack of a mobile ad platform is a gaping hole in Facebook’s portfolio, especially considering it had 425 million mobile monthly active users at the end of 2011. A company similar to AdMob (which sold to Google) or Quattro Wireless (acquired by Apple) such as Millennial Media or Jumptap would go some way toward filling that gap. For regional expansion and consolidation, Facebook could make a move for any of a number of international competitors, including Cyworld in Korea, Mixi in Japan, Vkontakte in Russia or Renren in China. As the trend toward consumerization in the enterprise continues in the form of social networking and collaboration (salesforce.com’s Chatter or Oracle’s Social Network come to mind), Facebook could look at an enterprise offering as well. The leading candidate in this sector would be Jive Software, one of the most prized properties in the social enterprise space with a market valuation of about $1bn.

Rough start to 2012 as January tech M&A spending drops 70%

Brenon Daly

Contact: Brenon Daly

As the new year starts, tech acquirers have yet to really reach deep to do any deals. In January, aggregate spending on all tech transactions across the globe plummeted to just $3.5bn – the lowest monthly level since the bottom of the recession in February 2009. Compared to the January 2011 total of $11.8bn, the value of deals announced in the just-completed month fell by a whopping 70%. The number of transactions, however, was unchanged, year-over-year, at roughly 325.

A key point to make about deal flow in the just-completed month is that not a single transaction topped a half-billion dollars. In fact, the largest deal in January 2012 (Semtech’s all-cash $494m reach for semiconductor vendor Gennum) would only be the sixth-largest transaction of January 2011. Last year, January featured deals including Qualcomm’s $3.6bn purchase of Atheros Communications – which, at the time, stood as the largest chip transaction in four years – as well as Verizon’s big bet on cloud services with its $1.4bn acquisition of Terremark Worldwide.

The January totals extend a slump that has seen M&A spending sink dramatically below average in four of the past five months. Since peaking at a post-recession monthly record of $40.2bn last August, spending levels have plunged to $8.9bn in September, $14bn in October, just $4.3bn in November and $19.7bn in December.

Intel: the latest tech giant to buy patents

Contact: Thejeswi Venkatesh

Intel has announced the acquisition of 190 patents, 170 patent applications and video codec software from RealNetworks for $120m. The transaction comes just eight months after Intel bought SiPort, a Santa Clara, California-based company that made audio-processing semiconductors. We see these moves as an indication that Intel wants to integrate more media and graphics capabilities into its chips, which these purchases should help with.

Barely three days ago, Intel inked a deal with QLogic to buy its InfiniBand business for $125m. That already makes Intel’s M&A spending for 2012 more than 60% of its full-year 2011 spending. What’s more, Intel was reportedly one of the bidders for InterDigital Communications, whose patent sale was called off earlier this week due to a gap in valuation expectations (InterDigital was reportedly looking for $3bn).

Patent sales have become one of the overarching themes of recent M&A activity, and one that we expect to continue throughout the year (see our 2012 M&A Outlook – Introduction for a full report). The reason for this is partly for offense (to expand a vendor’s existing product portfolio, like this Intel transaction) and partly for defense (as a hedge against a lawsuit, as is the case in Google’s reach for Motorola Mobility). The importance of these deals also registers on the other side of the transaction, the seller of the IP. Consider the contrast: Wall Street sent shares of RealNetworks soaring (up about 34%) on word that it had struck its deal with Intel, while it punished shares of InterDigital for not getting a sale done. InterDigital is currently trading at just half the level it was last summer.

Intel’s M&A activity

Fiscal year Deal volume Deal value
2011 11 $377m
2010 7 $9120m
2009 3 $884m
2008 3 $8m
2007 1 $110m

Source: The 451 M&A KnowledgeBase

A vote of confidence?

Ben Kolada

Contact: Ben Kolada

There’s no denying that behavior in the equity markets is one of the main influencers on big-ticket M&A. Stock market stability provides a vote of confidence for corporate acquirers to pursue large, game-changing deals. Without stable markets, the valuation gap between buyers and sellers becomes too wide for potential sellers to accept. As a result, when the equity markets dip, so too does deal volume.

Nearly every drop in the tech-heavy Nasdaq Composite stock index coincided with a drop in both the volume and value of acquisitions of publicly traded technology companies. (Note: we’ve limited the scope of this research to the acquisition of Nasdaq- and NYSE-listed companies valued at more than $250m.) The number of acquisitions of large public companies tracks the stock market so closely that while the Nasdaq ended 2011 basically flat from the prior year, so too did the number of large tech transactions.

Public company acquisitions relative to Nasdaq activity

Source: The 451 M&A KnowledgeBase, 451 Research

By early 2012, the Nasdaq had effectively regained the level it held before the credit crisis. Despite this bull run, however, there’s very little certainty or stability in the equity markets. Although not a flawless metric, we can use predictions for the IPO market as a gauge of 2012 activity. A stable stock market is desired before a private company hits the public stage. According to our 2011 Tech Banking Outlook Survey, which forecasts activity for 2012, bankers expect the public markets to be stable enough to welcome 25 new technology firms this year – the same number predicted for 2011.

But the number of IPOs is only half of the equation, as subsequent stock performance shows longer-term confidence in the newly public companies’ businesses. In 2011, we saw a number of fairly successful tech IPOs, many of which came from the consumer technology sector, such as LinkedIn and Zynga. But some of these vendors’ initial good fortunes were short-lived. LinkedIn, for example, has lost one-quarter of its market value since the company debuted in May 2011, and Zynga is trading below its offer price.

Among the top issues affecting stock markets are progress toward resolving or containing the European debt crisis and an agreement by the US congress on a bipartisan plan that would reduce the federal deficit by at least $1.3 trillion over the next 10 years. A full 85% of tech bankers surveyed answered that progress on the European debt crisis would increase M&A activity, while 73% said the same about progress on reducing the federal deficit. However, neither of these issues seems likely to be resolved anytime soon. The European sovereign debt crisis appears particularly hairy, after credit rating agency Standard & Poor’s recently downgraded nine major European nations’ credit ratings. Meanwhile, presidential election season in the US is likely to cause most to focus on campaigning rather than the federal deficit. While many weigh their options in voting for the next US president, the stock market may lose its vote of confidence, and deal volume could decline as a result.

PE firms play small ball

Brenon Daly

Contact: Brenon Daly

After years of writing multibillion-dollar checks in some of the largest tech transactions, private equity (PE) shops dramatically scaled back their purchases in 2011. The single biggest deal last year (The Blackstone Group’s $3bn take-private of healthcare technology vendor Emdeon) only ranked 15th among the largest transactions in 2011.

It was the first time PE firms haven’t have a hand in at least one of the year’s 10 largest deals since 2008. Even in the recession-wracked year of 2009, one buyout slotted into the top 10. And in 2010, when the economy appeared to be solidly recovering and the credit markets were more welcoming, PE firms accounted for fully three of the 10 largest transactions of that year. But last year, the buyout barons were overwhelmed by their corporate rivals, who are flush with cash.

A continuing M&A recovery in 2011

Brenon Daly

Contact: Brenon Daly

The choppiness that was felt in the overall M&A market in 2011 also came through in the totals for the year. While the number of transactions hit a five-year high, spending on tech deals in 2011 didn’t necessarily keep pace. The total value of transactions announced last year around the globe rose 17% to $219bn. Still, the increase in 2011 represented the second straight year of higher M&A spending following the dramatic decline in the recession of 2008-2009. However, the total for 2011 is only about half the value of deals announced in the previous years of the tech bull market.

Overall, dealmaking in 2011 started slowly, but then dramatically picked up in late spring and early summer. But that rebound stalled as uncertainty around European stability pushed out acquisitions, or canceled them altogether. The concerns knocked M&A spending in November to the lowest monthly level seen since the depths of the recession in February 2009. And while spending did rebound in December to a more typical level of nearly $20bn, the final few months of 2011 were hardly a robust time for significant transactions. Just one of the 10 largest deals of last year was announced in the final quarter of 2011.