Category: technology stocks

Lawson ‘Infor-med’ of unsolicited offer

Brenon Daly

Contact: Brenon Daly

In the middle of last year, we penciled out a takeout scenario for Lawson Software that gave the old-line maker of ERP software an equity value of about $1.7bn. Turns out we were off by just $100m. On Friday, the acquisitive, private equity-backed rollup machine Infor Global Solutions floated an unsolicited $1.8bn offer for Lawson. The target said only that it has retained Barclays Capital to advise it on the process.

We thought Lawson might find itself in play because activist shareholder Carl Icahn had taken about 10% of the company’s stock and started talking about ‘maximizing shareholder value.’ (Some of that has already showed up in Lawson’s recent stock chart. When Icahn revealed his stake last summer, shares were changing hands at about $8 each, compared to the $11.25 offer from Infor. We would note that the stock traded through the bid on Monday, hitting a high of $12.87 before settling down at about $12.25 in afternoon activity.)

In many ways, Lawson presents something of an easy target for Icahn and the would-be buyout group. License revenue has slipped in both of the company’s quarters so far this fiscal year. Meanwhile, it has been deemphasizing its consulting services, which is still one-third of total sales. So that business is dropping, too. The only growth has been seen in Lawson’s maintenance revenue. That business runs at an 80% gross margin, one of the main reasons Lawson generates so much cash.

Over the past four quarters, Lawson has thrown off some $116m of EBITDA on $745m of sales, a healthy 16% margin. If we put that trailing performance against Infor’s bid, Lawson is garnering a not-too-shabby multiple: 2.4 times sales and 15x EBITDA. Infor’s bid represents the highest price for Lawson stock in nine years, and would be CEO Charles Philips’ first deal since coming over from Oracle last October.

Slimmed-down LSI catches eyes on Wall Street

Brenon Daly

Contact: Brenon Daly

Wall Street’s vote on NetApp’s purchase of the Engenio division from LSI is pretty clear: the seller got the better end of the deal. On an otherwise tough day on the market Thursday, LSI shares were one of the rare spots of green on trading screens as investors backed the company’s move to focus more on its chips business. The stock closed up 3%, with volume was more than twice as heavy as average. On the other side, NetApp slumped 6% on trading that was four times heavier than a typical day.

The reaction comes after LSI, advised by Goldman Sachs, announced plans after the closing bell Wednesday to sell its Engenio external storage systems business to NetApp for $480m in cash. (Over the past decade, LSI had several plans to spin off that unit in an IPO, but never managed to get it done.) The deal, which is expected to close within 60 days, continues a run of divestitures that LSI has undergone, including shedding divisions serving mobility and consumer products.

We would note that Engenio is garnering a valuation of just 0.7 times sales, a smidge below the more typical 1x sales seen in many divestitures. (For instance, when LSI shed its mobility products unit in mid-2007, that business garnered 1.2x trailing sales.) Still, the discount doesn’t seem to have mattered to Wall Street.

Limelight raises cash, could go shopping

Contact: Jim Davis, Ben Kolada

Fresh off its recent secondary, Limelight Networks could well look to put some of that recently raised cash to work in some shopping trips. (It now has more than ample resources. Last week’s offering netted Limelight $77m, essentially doubling its cash holdings.) If it does look to do a deal or two, we expect that Limelight’s next acquisition will complement its core content delivery network (CDN) business. The company has already been broadening the range of services it can provide in the video ecosystem, most notably with the $110m purchase of EyeWonder’s ad campaign creation business in December 2009 and most recently with the tiny acquisition of Delve Networks, a provider of online video platform services.

One area Limelight could buy into is peer-to-peer (P2P) delivery, since the CDN industry is facing growing concerns about the ability to manage increasing loads of Internet video traffic. There are some providers making a go of P2P by creating tools and services around P2P-assisted game delivery, including Pando Networks and Solid State Networks, that would complement Limelight’s HTTP delivery service. Limelight could also take a look at Octoshape, which has done a significant amount of work in live video transport via P2P-assisted delivery. Octoshape’s service can utilize multiple cloud platforms to scale video-streaming delivery – so even if Limelight isn’t used as the origin CDN, it could gain a tool for providing extra streaming capacity to content owners dealing with delivering large events (think the Olympics or World Cup Soccer) to massive audiences that might wind up overwhelming even the largest CDNs.

If Limelight continues to structure its purchases as it historically has, the company could use its cash and securities to make a fairly large acquisition. To date, slightly more than half (57%) of the $117.6m Limelight has spent on M&A has been in cash, with the remainder in stock. Combine that structuring with the nearly $150m of cash and marketable securities Limelight now holds, and it could wield $300m in buying power. However, the company would obviously have to temper any equity use so it wouldn’t significantly dilute existing shareholders. And we would add that Limelight’s shareholders are a fairly satisfied bunch, with the stock having doubled over the past year.

Western Digital goes big in storage

Contact: Henry Baltazar, Brenon Daly

After flirting with a potential IPO, Hitachi Global Storage Technologies (GST) is set to be snapped up by its hard drive manufacturing rival Western Digital (WD) for $4.25bn in cash and stock. The deal would be the largest transaction in the storage industry in more than seven years, and would solidify WD’s position as the biggest hard drive vendor.

Beyond the benefits of consolidated manufacturing and increased market share, the Hitachi GST acquisition provides WD with credibility in the enterprise market, which was the key handicap it had to overcome against its longtime rival Seagate. Wall Street certainly saw it that way, sending WD shares up 14% in heavy Monday-morning trading. (WD indicated that the combination, which is expected to close in the third quarter, would be immediately accretive to non-GAAP earnings.)

We would also note that Hitachi GST’s expertise in enterprise SAS and fiber-channel hard drives was the key asset that led to its partnership with Intel for enterprise-class solid-state disks, and WD will now benefit from having these high-performance NAND flash products in its lineup. In the Hitachi GST/Intel partnership, though Intel manufactures the drives and supplies the NAND flash for the units, the products have Hitachi GST branding and are sold through Hitachi GST’s business partners.

The logic behind that strategy stemmed from the fact that Hitachi GST already had relationships with major enterprise storage and server providers, which would have made it easier for the products to get through qualification cycles at OEM partner sites. With this deal, WD will also attempt to leverage these relationships to build up its market share well beyond the consumer space.

PE firms back at the table

Brenon Daly

Contact: Brenon Daly

The buyout barons might not be as powerful as they were before the Credit Crisis, but that doesn’t mean the financial buyers can’t elbow aside their rivals from the corporate world. Earlier this week, Golden Gate Capital topped an existing agreement that Conexant Systems had with fellow chipmaker Standard Microsystems. While it wasn’t unusual for private equity (PE) firms to take auctions when credit was flowing cheap and easy, it’s been relatively rare in the past two years.

Terms call for Golden Gate to hand over $2.40 for each share of Conexant, giving the deal an equity value of roughly $180m. (Additionally, the company carries $86m of net debt.) The buyout firm’s all-cash offer topped a cash-and-stock bid of $2.25 per share from Standard Microsystems. The new agreement has a ‘no shop’ clause and is not conditional on financing. It also carries a $7.7m breakup fee, exactly the same amount that Standard Microsystems is pocketing for its trouble.

A 7% bump in acquisition price may not seem like much, but it could be an early signal that PE firms are getting much more aggressive in deals. That’s actually what corporate development executives told us they expected in 2011 from their PE rivals. In our annual survey, nearly four out of 10 (38%) corporate buyers said they expected more competition from buyout shops, compared to just 13% who said the opposite.

The year of the privately held storage supplier?

Contact: Simon Robinson

The storage M&A market is expected to favor smaller private providers this year, as recent activity has reduced the number of available midsize public targets. Indeed, in the past 24 months, Data Domain, 3PAR, Isilon Systems and Compellent have all been taken off the market. And buyout speculation caused by this recent spate of activity has bloated valuations at remaining public firms, such as CommVault, making them less likely to be acquired next.

But while recent public storage acquisitions may have halted the sales of their public peers, they may have actually benefited private suppliers. For example, EMC’s reach for Isilon highlighted the growing requirement for high-scale storage systems in markets where the exponential growth of highly rich – or ‘big’ – data is a key pressing challenge. Indeed, that deal could be important in refocusing attention on the remaining privately held players.

We took a look at several of the remaining private targets in a recent Sector IQ and noticed that would-be buyers still have several options to choose from. Though the IPO window has been closed for a couple of years, there are many attractive storage specialists that are fairly mature on both the product and go-to-market fronts, and a closer examination reveals a number of storage system specialists that were formed in the late 1990s that are still making headway today. Click here for our full report on potential targets in the storage sector.

Out with the old, in with the new

Brenon Daly

Contact:  Brenon Daly

Just over the past week, we’ve been struck by the fact that after in-house development efforts came up short, companies simply reached out of house for other companies that were doing the same thing – only better. In one case, it was to buy; in another case, it was just to partner.

Take Hewlett-Packard’s purchase earlier this week of Vertica Systems. (Subscribers can see our full report on the transaction, including our estimates of the undisclosed deal terms.) The purchase came just three weeks after HP said it was phasing out its Neoview platform, which never caught on in the otherwise fast-growing data-warehousing market. (We’re just guessing, but the move might have also been rooted in personal reasons, as well as financial reasons. Neoview was closely associated with HP’s former CEO Mark Hurd, who has been taking shots at his former shop ever since he joined Oracle.)

Although that acquisition doesn’t entirely line up with Nokia’s ‘strategic alliance’ with Microsoft, there are more than a few echoes. In both cases, a tech giant – armed with tens of millions of R&D dollars, not to mention dozens of engineers dedicated to the effort – was in danger of slipping into irrelevancy in an explosively growing market. The agreements represented dramatic about-faces for HP and Nokia. But that’s probably better than both trying to put a good face on what the market has said is a losing effort.

Nokia + Microsoft = Love?

Brenon Daly

Contact: Brenon Daly

Maybe it’s the fact that today is Valentine’s Day and love is in the air, but we’ve been thinking about the recent closeness of Nokia and Microsoft in a whole new way. Recall that the Finnish handset maker said on Friday that it’ll be basically breaking up with its own OS to start dating Windows Phone. ‘You’re just not doing it for me anymore,’ the hardware told the software before also asking Symbian to clean its stuff out of their previously shared house. ‘Don’t forget your toothbrush.’

By dumping its longtime partner, Nokia has cleared the way for a new relationship with Microsoft, which looks like a compatible union to our eyes. After all, both giants are on a slow fade right now, largely watching while the rest of the mobile industry passes them by. (To put that into human terms, we can’t help but envision Nokia and Microsoft as a somewhat elderly couple, more likely to watch On Golden Pond (on VHS, no less) than to head out to the theater and catch The Social Network, for instance.)

Have these companies truly been struck by Cupid’s arrow? Is the ‘strategic alliance’ just a bit of handholding before a proper marriage? Well, from our view, an acquisition – although still unlikely – is less unlikely than before. Why? For one thing, the block to this long-rumored pairing has always been that Microsoft wouldn’t want to jeopardize its relationships with other device makers by settling fully on Nokia.

But frankly, that’s less of a concern now if only because Windows Phone has been left behind, even by hardware makers that have long relied on Microsoft for software to power their computers. For instance, Dell has largely embraced Google’s rival OS, Android, for its tablets. And Hewlett-Packard went out and dropped $1bn on Palm Inc to have its own OS for devices rather than continue to run Microsoft’s mobile OS. Given that many of its former partners have already paired off, maybe Microsoft believes the time is now to tie up with Nokia, for better and for worse.

A four-bagger for VMware

Brenon Daly

Contact: Brenon Daly

If the virtualization thing doesn’t work out for VMware, the company could always spin off a hedge fund. At least that’s what we’ve been thinking as Verizon Communications’ purchase of Terremark Worldwide appears set to close very soon. When the deal does wrap, VMware will walk away with a tidy windfall from a savvy bet that the virtualization kingpin made on the hosting provider back in mid-2009.

Recall that in May 2009, VMware picked up a 5% stake in Terremark for $20m, paying just $5 for each of the four million shares. According to terms, that block of equity will be worth $76m when it comes time to cash out to Verizon, which is paying $19 for each Terremark share. A four-bagger in just a year and a half is a return that might even make John Paulson envious. The gain on VMware’s investment in Terremark even outpaces the return of its own highflying stock, which has ‘only’ tripled in that time.

A public signoff from McAfee

Brenon Daly

Contact: Brenon Daly

After nearly two decades in some form or another as a public company, McAfee all but certainly reported its quarterly results to Wall Street for the final time on Tuesday morning. The company’s sale to Intel is expected to close in the coming weeks, a deal that will bring the largest stand-alone security vendor under the ownership of the largest semiconductor maker. For 2010, McAfee reported sales of $2.1bn and cash from operations of $595m. It didn’t hold a conference call because of the imminent close of its sale to Intel. (We suspect that the company won’t miss that quarterly ritual.)

The unexpected acquisition, which received our Golden Tombstone award as the most significant transaction of last year, was supposed to have already closed. When the $7.7bn deal was announced in mid-August, the companies indicated that they expected it to close before the end of 2010. It got overwhelming clearance from McAfee’s shareholders in early November, with 1,500 ‘yes’ votes for every one ‘no’ vote. US regulators signed off on the transaction in December.

But it took another month for European regulatory authorities to give their blessing – and they did so only conditionally. Among other things, Intel had to assure the European Commission that it won’t prevent other security providers from working on its chips and that the vendors will be able to use ‘functionalities’ of Intel’s products in the same way that McAfee is able to. While Intel may not be thrilled about making concessions to the EC, at least the six-month-old deal isn’t getting bogged down there. Remember that it took Oracle some nine months to close its purchase of Sun Microsystems, largely because of European regulatory concerns.