Category: technology stocks

The single most accretive tech acquisition ever

Brenon Daly

Contact: Brenon Daly

With the passing of Steve Jobs earlier this week and all the deserved praise for the late Apple impresario, we can add one more tribute from the world of M&A: Jobs is the central figure in what’s probably the most accretive tech deal ever done. Remember that it was the purchase in December 1996 of the company that he founded after initially getting fired from Apple (NeXT Computer) that brought Jobs back to Apple.

So viewed that way, the once-and-future king at Apple only got to play that role because Apple acquired NeXT for some $400m. Without that deal, there’s every chance that Jobs wouldn’t have returned to Infinite Loop, and that the company would have simply continued on its path toward irrelevance in the PC Era. Instead, Job worked his magic, introducing computers, music players, phones, tablets and other products that customers may not have known they wanted but found they couldn’t live without.

To get some sense of the impact of Jobs’ return to Apple, consider this: when Apple acquired NeXT, shares of the company were in the single digits. They closed Thursday at $377. Under Jobs’ watch, shares rose almost 6,000%, giving it a current market valuation of $350bn. Apple currently enjoys the richest market cap of any company on the planet. And all that came from a deal that was part IP and part HR.

The two halves of the third quarter

Brenon Daly

Contact: Brenon Daly

It’s rare that a single quarter is divided so cleanly into two completely different – almost irreconcilable – halves. Yet that’s exactly how tech M&A played out in the just-closed third quarter. From the start of July until the middle of August, dealmaking followed the same arc of recovery that it had tracked for most of 2011. And then, seemingly overnight, the stability and confidence vanished, swept away by renewed concerns about the state of the global economy. That left M&A in the back half of the quarter looking a lot like it did in the recession years of 2008 and 2009, rather than earlier this year.

Recent quarterly deal flow

Period Deal volume Deal value
Q3 2011 934 $62bn
Q2 2011 942 $67bn
Q1 2011 914 $86bn
Q4 2010 794 $41bn
Q3 2010 791 $50bn

Source: The 451 M&A KnowledgeBase

Just to put some numbers to the split Q3, consider this: two-thirds of M&A spending came in the first six weeks of the quarter, with the final six weeks accounting for the remaining one-third. (Incidentally, that’s the direct inverse of the typical seasonal pattern for Q3, which almost invariably finishes stronger than it starts.) The number of deals in the second half of Q3 dropped more than 10%. More significantly, however, the transactions that did get done toward the end of the quarter were much more conservative than the deals inked earlier. Of the 20 largest transactions announced in the July-September period, only four came in the back half of Q3. Click here for a full report on the challenging third quarter.

The September slump

Brenon Daly

Contact: Brenon Daly

It seems September wasn’t just a month to forget for the Boston Red Sox. Tech M&A also had a slump of its own this month. Although the decline in dealmaking wasn’t nearly the historic proportion of the ‘BoSox debacle,’ which saw the team drop 20 of its final 27 games and miss the playoffs, spending on acquisitions in September came in at its lowest monthly tally in 2011.

The aggregate value of all tech deals announced in September totaled just $8.5bn. (And nearly half of that amount came from a single transaction, Broadcom’s $3.9bn all-cash offer for NetLogic Microsystems.) Not only is September the lowest monthly total so far this year, it also represents a decline of one-third from spending in September 2010.

The slowdown in September also reverses the typical seasonal pattern of the third quarter. In recent years, roughly two-thirds of the entire M&A spending in Q3 has taken place in the back half of the quarter. But then, economies around the globe are currently facing more challenges and uncertainties than they have at any point since the Great Recession ended. That could make for a pretty tough finish for M&A in 2011, a year that started out solidly on the road to recovery.

M&A activity, Q3

Period Deal volume Deal value Number of deals valued at $1bn or more
Sept. 2011 279 $8.5bn 1
Aug. 2011 335 $40.2bn 6
July 2011 319 $12.9bn 4

Source: The 451 M&A KnowledgeBase

A renaissance of PE interest in Renaissance

Brenon Daly

Contact: Brenon Daly

In 2010, PLATO Learning went private in a relatively straightforward process that took just two months from Thoma Bravo’s announcement of the leveraged buyout (LBO) of the online education vendor to the close of it. Now, privately held PLATO is drawing out – and making more expensive – the LBO of fellow online education provider Renaissance Learning. PLATO has been part of a bidding war for Renaissance that has been playing out since mid-August.

In the original offer, buyout firm Permira planned to acquire Renaissance, which has been public since 1997, in a deal valued at $440m. (Somewhat unusually, terms call for Permira to pay one price for Renaissance’s common shares that trade on the Nasdaq while paying a lower price to the cofounders of the company, who control 69% of the equity.) PLATO then topped Permira’s opening bid a week later.

Earlier this week, Permira raised its offer, as did PLATO. However, the board continues to support the Permira bid – even though it values Renaissance at $16m less than the offer from PLATO. The reason? The cofounders don’t want to sell to PLATO. Other shareholders, who represent the remaining 31% of Renaissance equity, will have a chance to vote on Permira’s offer on October 17

Certainty for some, uncertainty for others

Contact: Thejeswi Venkatesh

Despite a few high-profile acquisitions recently, some companies have trouble finding buyers. For instance, STX pulled out of contention for Hynix Semiconductor, citing market uncertainties. This was the third time in as many years that the creditors-turned-owners of Hynix, whose revenue mix consists of more than 70% DRAM and about 25% NAND flash, have tried to unburden themselves of their stake. Hynix now has just one suitor, SK Telecom, a dynamic that probably won’t help the company’s sale price.

The fact that STX is walking away isn’t surprising, given the erosion of business at Hynix. In a recent filing, Hynix indicated that its revenue in the recent quarter declined 16% to $2.4bn on a year-over-year basis. The company reported that DRAM sales will further decline due to falling PC sales although Flash, used in all mobile phones, will see a moderate increase. Hynix’s primary competitor, Micron Technology, also saw a decline in sales and is currently trading at less than 1 times sales and a paltry 1.8x trailing EBITDA. Both Micron and Hynix operate at a gross profit in the mid-20% range. (To put things in perspective, Qualcomm runs at an overall profit margin of 30%.)

Of course, these travails are not limited to the tech sector. Cerberus Capital Management and a partner recently withdrew their bid for Innkeepers USA, a hotel chain operator, also blaming market uncertainties. The two sides are currently fighting it out in court over whether the buyout shop and its partner has to hold to its plan, or whether there has been a ‘material adverse change’ that lets the would-be buyers walk away from the deal.

SaaS giant salesforce.com thinks small

Brenon Daly

Contact: Brenon Daly

Just several months after putting money into Assistly in its second round of funding, salesforce.com decided Wednesday to pick up the whole startup for $50m. The purchase should help the SaaS giant extend its customer service offering, Service Cloud, to small businesses. Founded in 2009, Assistly had drawn in more than 1,000 customers, although not all of those are paying. (Salesforce.com declined to give a breakdown on paying vs. nonpaying customers, but indicated revenue at the startup was a tiny amount.)

The acquisition marks the third time salesforce.com has stepped into the M&A market to bolster its customer service product. Three years ago, it reached for InstraNet, a startup that was led by Alex Dayton, who continues in an executive role for the customer service offering at salesforce.com. A year ago, salesforce.com quietly added Activa Live. (Although terms weren’t disclosed, we suspect the bill for that purchase probably only ran in the single digits of millions of dollars.) The net result of those acquisitions – along with healthy organic growth – is that Service Cloud is now the largest single product outside salesforce.com’s core sales force automation product.

Additionally, salesforce.com says Assistly will be part of its upcoming launch of a ‘small business cloud’ product. In that, Assistly will be joining the collaboration offering that salesforce.com picked up with its acquisition of SMB-focused startup Manymoon in February. The reason for the new downmarket products is pretty clear when you remember that salesforce.com gets roughly one-third of its overall revenue from small businesses.

S1 is out of one deal, still in a second deal

Brenon Daly

Contact: Brenon Daly

We now know that S1 Corp won’t be a buyer, but whether the financial software company is a seller remains an open question. Late last week, S1 scrapped its three-month-old plans to acquire Fundtech, pocketing an $11.9m breakup fee for its trouble. (That represents a not-insignificant windfall for a company that has only earned $2.2m so far this year, on a GAAP basis.)

Instead, Fundtech will be picked up by private equity firm GTCR in a deal that appears much more straightforward than S1’s original offer. For starters, GTCR is paying in cash, while S1 was planning on a mix of cash and stock. But maybe more importantly, there’s a fair amount of uncertainty hanging over S1 itself, as the company is still fending off an unsolicited acquisition offer.

A month after launching the bid for Fundtech, S1 received an offer of its own from ACI Worldwide. The two sides have been scrapping ever since. S1 has told its shareholders not to back ACI’s proposed bid, warning that there are ‘serious, unaddressed concerns’ such as antitrust challenges and ACI’s plan to raise some $450m in the credit market.

CommVault going it alone

Brenon Daly

Contact: Brenon Daly

Even though many of the storage companies that went public over the past half-decade have subsequently been erased from the market through M&A, don’t look for CommVault to join that list. At least that’s the official word from the top of the company. CEO Robert Hammer said during his presentation at ThinkEquity’s Annual Growth Conference last week that the odds of his company getting acquired are ‘diminimous.’

CommVault is often mentioned as a takeover target, with Dell generally being viewed as the most likely buyer. Dell is CommVault’s largest OEM partner, accounting for a bit more than 20% of the company’s overall revenue. Dell has already purchased a half-dozen storage vendors, including EqualLogic and, most recently, Compellent Technologies. And now that Dell has punted its relationship with EMC, building up its own storage portfolio is a key mandate. (As one of the largest stand-alone backup software providers, CommVault competes primarily with Symantec, but also bumps up against EMC and IBM, among others.)

CEO Hammer says that rather than join the M&A parade, he’s planning to build CommVault into an independent company with sales of $1bn and an operating margin of 25%. That implies CommVault tripling revenue and more than doubling the operating margin. (One of the main reasons why CommVault runs at a relatively low 11% operating margin is because it spends more than half of its revenue on sales and marketing.) Hammer declined to set a timeframe for when the 11-year-old firm would hit those targets.

Shorting follows shopping at KIT digital

Brenon Daly

Contact: Brenon Daly

Following an M&A spree earlier this year that had some on Wall Street skeptical, KIT digital says it’s now in ‘harvest’ mode from its earlier deals. In the first four months of 2011, the video asset management (VAM) vendor scooped up five companies. Although that’s the same number of deals it did in all of 2010, KIT digital’s recent acquisitions have been dramatically larger than the transactions inked last year. The collective tab of slightly more than $200m for 2011 deals is five times the amount the company spent last year.

KIT digital’s big spending brought out some bears. The stock has shed about one-third of its value so far this year, compared to the flatlining Nasdaq. (It dropped another 10% on Thursday after KIT digital announced that it will be selling about $30m worth of shares at a price that’s only slightly above the low point of its valuation over the past year. The stock, which opened the year above $16, traded around $9.50 on Thursday afternoon.)

In addition, the number of people who are shorting KIT digital has doubled since the company started its fast-track M&A program. According to the most recent numbers, nearly 10 million shares of KIT digital are sold short, up from 4.4 million at the start of 2011. Conscious of that, the company said earlier this week at the ThinkEquity Growth Conference that it was almost certainly out of the M&A market for now, and that its financials are getting much ‘cleaner’ now that it has closed – and accounted for – its recent acquisitions.

The ball is rolling in semiconductor networking M&A

Ben Kolada

Contact: Ben Kolada, Thejeswi Venkatesh

In announcing its largest-ever deal, and paying a princely price at the same time, Broadcom is keeping the ball rolling in semiconductor networking M&A. The company’s nearly $4bn pickup of NetLogic Microsystems comes less than two months after rival Intel announced a smaller strategic play of its own, and it likely won’t be the last transaction before the buyout curtain closes.

After a dearth of big-ticket semiconductor networking acquisitions, such vendors are now becoming hot properties. Before announcing its landmark NetLogic purchase, Broadcom itself bought networking provider Teknovus in February 2010 for $123m (in an earnings call, Broadcom mentioned that Teknovus generated revenue in the single digits of millions, which implies a price-to-sales valuation far north of 10x). And in July, Intel announced that it was acquiring Fulcrum Microsystems for a price we hear was in the ballpark of $175m, or about 13x trailing sales.

Broadcom’s richly priced offer for NetLogic, which values the target at 9.2x trailing sales, likely won’t be the last deal in this sector. If you ask The Street, the next companies to get scooped up could be Cavium Networks or EZchip Technologies. Shares of both firms surged following Broadcom’s announcement. As for likely acquirers, we could point to deep-pocketed vendors Qualcomm and Marvell Technology. With $10.7bn and $2.4bn of cash in their coffers, respectively, either company could easily digest Cavium, which currently sports a market cap of roughly $1.7bn.