Category: technology stocks

At long last, Open Text makes a BPM play

Brenon Daly

Contact:  Brenon Daly

More than a year and a half ago, we noted that Metastorm was looking to buy its way into some adjacent markets such as risk and compliance or perhaps collaboration. The planned shopping trip would have come after the business process management (BPM) provider pulled its IPO paperwork. At the time, however, we wondered if the would-be IPO candidate might not head to the other exit: a trade sale.

Specifically, we floated the single name of Open Text, which we noted had consolidated much of its core enterprise content management (ECM) market but still appeared to be losing deals to rival vendors with more robust BPM offerings. However, we thought that valuation might make it tough to bridge the bid/ask spread between the two sides. In most of its dozen deals over the past decade, Open Text has paid somewhere in the range of 0.5-1.5 times trailing sales for its acquisitions. That’s true for its most visible purchases, including deals that saw it gobble up rival ECM firms Hummingbird in August 2006 and Vignette in May 2009, as well as add image capture software maker Captaris in September 2008.

As it turns out, valuation didn’t necessarily snag Open Text’s significant acquisition to bolster its BPM credentials. The company said late last week that it will hand over $182m in cash for Metastorm. In a conference call, Open Text indicated that Metastorm was generating $70-75m in sales, implying a valuation of about 2.5x sales for the BPM provider. That’s a fair bit richer than the valuation that the Canadian consolidator has paid in the past. However, we suspect that guidance assumes a bit of revenue write-downs and (perhaps) a bit of sandbagging. The reason? Metastorm said in mid-2009 that it was above that level of revenue in 2008 and targeting $90m in 2009. In its IPO filing, Metastorm reported $60m in sales for 2007.

KIT buys in bulk

Ben Kolada

Contact: Ben Kolada

No stranger to inorganic growth, video asset management provider KIT digital just announced three acquisitions worth $77m. The company’s recent dealmaking brings its total M&A spending to $151m since 2006 – a hefty sum considering that KIT currently sports just a $350m market cap. While similarly sized firms might stop for a breather, KIT plans to announce another large purchase by the end of the quarter.

KIT has bought KickApps, Kyte and Kewego as it continues to consolidate the video asset management market and add social media to its platform. Kyte, the least expensive of the three targets, will provide KIT with mobile video content delivery while Paris-based Kewego provides a video distribution software platform for internal communications to enterprises in the EMEA region. KickApps, arguably the most valuable of the acquired assets, provides social media software for interactive video to enterprises. (A side note: KickApps is betting the farm on the role that social media will play in KIT’s evolving business – the company’s equity holders took their $45m payout entirely in KIT digital stock.)

As if announcing three acquisitions at once isn’t enough, the company claims to be on track to close another large transaction by the end of the quarter. KIT wouldn’t comment on who its next target would be, and the video asset management market is still too fragmented to tell which companies are on KIT’s radar. But we expect that the new target will continue KIT’s M&A strategy of buying companies for geographic expansion, entry into new verticals and complementary technology. KIT will pay for its new property out of the proceeds from its recently closed IPO, which netted $103m.

KIT’s triple play

Date closed Target Deal value Target adviser Acquirer adviser
January 28, 2011 KickApps $44.7m America’s Growth Capital Janney Montgomery Scott
January 26, 2011 Kewego $26.7m Not disclosed No adviser used
January 25, 2011 Kyte $5.7m GrowthPoint Technology Partners No adviser used

Source: The 451 M&A KnowledgeBase

Motricity’s equity activity

Brenon Daly

Contact: Brenon Daly

Although shares of Motricity have been trading on the Nasdaq since mid-June, it’s only been in the past few weeks that most of the action has taken place. We have already chronicled the difficult birth of the company, which had to trim both its offer size and price to go public. Debt-heavy Motricity ended up raising only half the amount that it expected in its June IPO.

Born under a bad moon, Motricity appeared destined to live out a life of quiet woe on the public market. And for the first three months, that’s exactly how it played out for the mobile data platform provider. Shares changed hands in the single digits. Then the stock took off, tripling from September to November. (That run was enough to tempt Carl Icahn, a significant shareholder in Motricity, to look to lighten his load in December. However, the activist investor pulled the planned secondary last week.)

For its part, the company has found its own use for equity: an acquisition. Earlier this week, Motricity picked up mobile advertising and analytics startup Adenyo for $100m upfront and (perhaps) another $50m in an earnout. Terms call for Motricity to use an unspecified mix of cash and stock to cover the bill. Adenyo, advised by Citadel Securities, did get a collar on shares as part of the final consideration. But for now, the once-volatile shares of Motricity have been holding steady at about $20 each, which is at the high end of the collar’s range.

Time Warner Cable picks up NaviSite; is InterNap next?

Ben Kolada

Contact: Ben Kolada

In the second telco-hosting rollup in less than a week, Time Warner Cable is acquiring NaviSite for $230m in cash. This is TWC’s first foray into enterprise hosting and cloud computing services, and marks the end of a tumultuous year for NaviSite that included defending itself from an unsolicited take-private and continuously retooling its business toward enterprise-class services.

TWC, the second-largest cable operator in the US, is paying $5.50 per share, representing a 33% premium over the closing price on February 1. Including the assumption of cash and debt, TWC’s offer gives NaviSite an enterprise value of $277m, or 2.1 times trailing sales and 10.8x trailing EBITDA. While the offer is roughly in line with broad market valuation, it is far below what Terremark received from Verizon. In that deal, announced just last Friday, the target was valued at 5.8x trailing sales and 24.7x trailing EBITDA. Of course, we might argue that Terremark deserves its premium, since it is much healthier and larger than NaviSite. Terremark has 16 datacenters (compared to NaviSite’s 10) spread across a large international footprint, a robust and growing cloud platform and more than twice the sales of NaviSite.

While NaviSite is set to be acquired at a lower valuation than Terremark, TWC’s bid represents a level NaviSite hasn’t seen on its own since late 2007. Further, it’s substantially above the offer that NaviSite attracted just a half-year ago. In July 2010, Atlantic Investors, which already owned one-third of NaviSite’s equity, made an unsolicited offer for the remaining shares of the company. Atlantic Investors’ bid of $3.05 per share valued NaviSite overall at $128m. Time showed that NaviSite was right in rejecting that offer, which isn’t always the case in these unsolicited bids. After spurning the offer, the company continued in its dogged determination to become an enterprise-class hosting provider throughout 2010 and divested some $74m in non-core assets to get there.

After NaviSite’s sale, speculation is intensifying about which hoster will be acquired next. We’ve written before that Savvis is an obvious target, and Rackspace is the constant focus of acquisition speculation. We might add Internap Network Services to that list. The Atlanta-based company’s shares are up 6% in mid-Wednesday trading, continuing a run since the Terremark announcement on January 27. One reason we might point to a trade sale for Internap is that the chief executive has done it before. In January 2009, the company appointed a new CEO, Eric Cooney, who has a history of growing companies and leading them to successful sales. He was previously CEO of Tandberg, which was acquired by Ericsson for $1.4bn in 2007. Since Cooney’s appointment, Internap’s shares have climbed 170%, giving the company a market cap of slightly more than $400m. Look for a full report on TWC’s pickup of NaviSite in tonight’s Daily 451.

Tech M&A slumps to a start in 2011

Brenon Daly

Contact: Brenon Daly

January saw more tech deals than any single month of 2010, but M&A spending shows no sign of shaking off the slump it has been in for the past few months. The muted spending in the just-completed month marks the fifth straight month that the aggregate value for deals announced has come in only slightly above half of the monthly totals from last summer. And January is the lowest of the recent months.

We tallied some 308 deals in January, worth a total of just $11bn. That’s only slightly below the roughly $12bn monthly rate we’ve seen since last September, but it’s a far cry from the activity we recorded in the second quarter, where all Q2 months (April-June) topped $20bn in spending. (In terms of number of monthly transactions, deal volume ranged from basically 250-290 in 2010.)

In addition to the lower total value of deals, another troubling sign in January was the fact that spending was highly concentrated. The two largest transactions last month (Qualcomm’s purchase of Atheros Communications and Verizon’s acquisition of Terremark Worldwide) accounted for nearly half of all spending on deals announced in January. The 45% mark is higher than all but one of the previous four months, and notably above the 36% average for the September-December period.

Verizon pays sky-high price for cloud provider Terremark

Ben Kolada

Contact: Ben Kolada

In a move to accelerate its cloud services, Verizon has announced that it is acquiring cloud and colocation provider Terremark for $1.4bn. As the largest pairing between a telco and a colocation provider, the deal is not only a landmark transaction for the telecommunications industry, but also a significant shift from the growing trend of telcos buying their way into the hosting and colocation sectors by acquiring pure colocation providers.

Verizon is paying $19 per share in cash, a 35% premium over Terremark’s closing price. On an equity value basis, the deal values the target at 4.4 times trailing sales and 18.6x trailing EBITDA. For comparison, the next-largest telco-colo pairing came in May 2010 when Cincinnati Bell bought pure colocation provider CyrusOne for $525m, or 9.1x trailing sales and 16.4x trailing EBITDA. Both Verizon and Terremark’s board of directors have unanimously approved the transaction, and Verizon expects to complete the deal by the end of the first quarter. Terremark’s management team will remain and will operate the company as a wholly owned but independent subsidiary of Verizon.

While earlier acquisitions in this sector were valued based on the growth potential of colocation services, Terremark garnered a higher valuation because of its cloud portfolio, as well as its international presence. During their conference call discussing the acquisition, executives from both companies highlighted the fact that Terremark’s long-term growth lies in its cloud and managed services. This segment provided half of Terremark’s total service revenue during the first six months of its fiscal 2011. Beyond cloud services, the acquisition is also a geographic fit, with Terremark providing Verizon an expanded presence in Latin America, and Verizon providing Terremark additional room to grow in both the US and Europe. As part of the integration, Terremark will assume operations for all of Verizon’s 220 datacenters. (We’ll have a full report on this deal in tonight’s Daily 451.)

After the transaction was announced, shares of competing cloud computing firms soared. While the sector calmed somewhat by midday, shares of Savvis held onto its 15% advance as Wall Street speculated that it might be the next hosting and services company to get snapped up. (Trading in Savvis was more than 10 times its daily average on Friday.) By revenue, the Chesterfield, Missouri-based firm is the largest provider of cloud and colocation services and already sports a $1.7bn market capitalization. As a result, the list of potential suitors is limited, but AT&T stands out as an obvious bidder for Savvis. Just as Savvis is the largest provider among cloud firms, AT&T is the largest provider among telcos and closed 2010 with $124bn in revenue and $1.4bn in cash in its coffers.

Trustwave surfing toward an IPO?

Brenon Daly

Contact: Brenon Daly

After two IT security companies put in their IPO paperwork last summer, we’re hearing that Trustwave is almost certain to be the first filer in 2011. The PCI-compliance vendor is currently baking off, with the selection of bankers expected to be complete next week. The actual prospectus would likely be filed around April and the offering would hit later this year, according to several sources.

If the filing goes ahead as planned, Chicago-based Trustwave would join both SafeNet and Tripwire as security providers looking to join the ranks of public security companies. (Or in the case of SafeNet, rejoin the ranks of public security companies.) Our understanding is that Trustwave finished 2010 with roughly $125m in sales, and continues to generate cash. Depending on the timing of the offering, the vendor would likely come to market with a valuation in the neighborhood of a half-billion dollars, according to our quick, back-of-the-envelope math.

Founded in 1995, Trustwave has expanded far beyond its original focus on PCI auditing and remediation, largely through M&A. It has acquired seven companies in the past three years, most of them small firms that, for the most part, were having a tough go of it on their own. Trustwave then adds the acquired technology on top of its Linux platform (TrustOS) and offers it to customers either through an on-premises product or a managed service. All in, Trustwave counts some two million customers.

Comings, goings and growings in the data-warehousing market

Brenon Daly

Contact: Brenon Daly, Matt Aslett

Over the past two and a half years, tech giants such as Microsoft, IBM and EMC have all inked major data-warehousing (DW) acquisitions, running up a collective bill of some $2.5bn. All that time, Hewlett-Packard stayed out of the shopping spree, opting to develop its own DW offering in-house. On Monday, HP conceded that those efforts haven’t generated the return that it was looking for, and indicated that it would phase out sales of its Neoview product.

HP is expected to continue its DW-related partnerships, including a recently announced accord with Microsoft to deliver four new data appliances. On its own, however, HP wasn’t able to capture much business in the fast-growing DW market, in part because the company approached it as a services play. (My colleague Matt Aslett noted some of the struggles HP was having with Neoview in a recent report, where he indicated that if HP was serious about DW it should have either reached for Netezza or made the big move for Teradata.) It couldn’t have helped Neoview, either, that it was so closely associated with former CEO Mark Hurd, who is being erased as quickly as possible from HP since his unceremonious departure last summer.

HP’s shift away from directly focusing on the DW market comes as Teradata enjoys its richest-ever valuation. (Shares of Teradata, which is the largest and most-visible DW vendor, have jumped about 60% over the past year, giving the company a $7.7bn valuation.) We’re also hearing that Teradata may be looking to do a deal of its own. Having just closed its purchase of Aprimo to get into the business application market, the buzz is that Teradata will shift its M&A focus back to its basic business, perhaps picking up additional analytics and other DW technology.

SolarWinds looks to shine in other markets

Brenon Daly

Contact: Brenon Daly

Having built a billion-dollar market cap through a cheap and easy offering for network management, SolarWinds is looking to take that approach to new markets through small acquisitions. Exactly a year ago, the company picked up Tek-Tools to add storage management to its portfolio, and now it steps fully into application performance management (APM) and virtualization management with its reach for Hyper9. SolarWinds is handing over $23m in cash for Hyper9, with terms also providing for a possible $7m earnout.

The addition of the small Austin, Texas-based startup, which had only about $2m in sales, gives SolarWinds its first stand-alone virtualization offering as well as a shoring up its APM product. (In the past, SolarWinds had a much less robust APM offering as a module to its flagship Orion product.) The moves also brings the company into more direct competition with management giants such as Hewlett-Packard, CA Technologies and Quest Software, among others.

In terms of competition, we would note with some irony that in a recent technology bakeoff that a nationwide grocery chain held for a monitoring product, Hyper9 got the nod ahead of SolarWinds, among other vendors. (See the full details in our User Deployment Report). So maybe part of the thinking at SolarWinds for the deal was if you can’t beat them, buy them

Everything is bigger at Big Blue

Brenon Daly

Contact: Brenon Daly

Sometimes, we forget why IBM is called Big Blue. The giant just reported $100bn in sales for 2010, making it more than twice the size of Cisco Systems and almost four times the size of Oracle. (Just on its own, IBM’s software portfolio is larger than all of Oracle, not to mention the fact that IBM’s software operations are vastly more profitable than Oracle.) IBM’s current valuation is big, too, with shares currently changing hands at their highest levels ever.

And, as we listened to the company discuss its recent financial results, we were reminded that it has a big appetite for deals. It dropped a cool $6bn on acquisitions last year, with half of that coming in just the fourth quarter. Just in the last year, IBM took two public companies off the board (Netezza, Unica), gobbled up another two companies that could have been looking for an IPO (Initiate Systems, BigFix), and was even on the buyside of an unusual $1.4bn divestiture (AT&T shedding Sterling Commerce). Of course, it’s easy to write those big checks when the company generated more than $16bn in free cash flow in 2010.