Category: technology stocks

A less-than-bullish outlook for corporate shopping

Brenon Daly

Contact: Brenon Daly

The results of our annual survey of corporate development executives are in and the outlook for technology M&A in the coming year is less than bullish. Consider this change in sentiment: the number of respondents who thought the overall M&A market would improve in the coming year dropped from half (52%) in the 2009 survey to just one-third (35%) this time. Meanwhile, the percentage that projected the market will be worse tripled from just 7% last year to 23% this year. The fact that roughly one out of four corporate buyers expects the market to deteriorate is a rather bearish sign, we would suggest.

Moreover, that bearishness around the overall market carries over to projections about their own company’s buying plans for 2011. Just half (52%) said they expected to be busier in 2011 than this year. That’s down from two-thirds (68%) who said the same thing last year. (In 2009, 15% of respondents said the acquisition pace at their firms would ‘increase significantly,’ twice the level that said the same thing in this year’s survey.) See our full report on the outlook for M&A activity and valuations in the coming year from corporate development executives.

Secondaries are primary for recent IPOs

Brenon Daly

Contact: Brenon Daly

The IPO window may be slammed shut right now, but the few tech companies that have managed to make it public have found the window wide open when it comes to selling more shares. In the past week or so, QlikTech, RealPage and IntraLinks have all priced their secondary sales. All three companies only came public last summer and have had strong runs since their debuts.

Recall that QlikTech priced its IPO above the expected range, something of a rarity in the current climate. After coming public in mid-July at $10, the stock traded above $20 two months later and has held that level. Shares in the analytics company closed at $23.79 on Tuesday. Incidentally, the company didn’t sell any shares in the offering. Instead, the three main backers (Accel Partners, Jerusalem Venture Partners and Stiftelsen Industrifonden) are all lightening their holdings in the 11.5-million-share secondary.

Meanwhile, rental property software provider RealPage put in the paperwork for its follow-on offering just three months after first selling shares to the public. The company sold four million shares, raising about $98m. Another 6.35 million shares came from selling shareholders, notably Apax Partners. Although RealPage initially came public below its expected range at $11, the shares have traded at twice that level since mid-October. RealPage closed Tuesday at $27.90, giving the company a market cap of about $1.8bn.

And IntraLinks priced its 10-million-share offering at $20 each. That’s up substantially from the $13 that the on-demand document management company first sold shares to the public back in early August. IntraLinks is selling two million shares, with the remaining eight million coming from its backers. The stock closed Tuesday at $19.16.

Dell’s less than ‘compellent’ bid

Brenon Daly

Contact: Brenon Daly

In what would be the third significant acquisition of a publicly traded storage vendor in the past four months, Dell said Thursday that it would offer $27.50 in cash for each share of Compellent (see our full report). The storage company reported 32.8 million shares (on a diluted basis) in its latest quarterly filing, giving the proposed transaction an equity value of $902m. (The final share count would likely be higher due to options vesting and so on.) But if we assume an equity value of $900m, the enterprise value of the deal would come in at roughly $840m. That’s 5.4 times Compellent’s sales of $155m in 2010 and 4.3x its projected 2011 sales of $195m. We would note that valuation is less than half the level commanded in the recent takeouts of both 3PAR (a bidding war pushed the level to 11.2x trailing sales) and Isilon Systems (12.8x trailing sales).

Of course, valuation is very much the issue in this ‘take-under.’ Dell’s bid of $27.50 compares to Compellent’s previous closing price of $33.65. Clearly, much of that advance came as a result of acquisition speculation, as Wall Street watched other storage vendors of roughly the same vintage get taken off the market. On its own, Compellent started the year trading at roughly $23, dropped to about $12 after whiffing its first quarter, and only got back above $20 in late October. Shares closed Thursday at $29.04 (on volume that was seven times heavier than average), indicating that investors aren’t necessarily willing to sell their shares to Dell at a lower price than they can get from one another.

Google’s growing video ambitions

Brenon Daly

Contact: Brenon Daly, Jim Davis

More than four years after Google acquired YouTube, the video content site is either putting up black numbers, or is very close to it. That’s according to hints offered recently by the company, although Google has often appeared unconcerned about the profitability of the wildly popular site that the search giant picked up in its second-largest acquisition. (YouTube could have slipped to Google’s third-largest deal, but it appears that rumored talks with Groupon have come to nothing.)

Just how popular is YouTube? Google recently indicated that a day’s worth of video (a full 24 hours) is uploaded every single second to the site. And while profitability has not been an immediate concern for YouTube, Google has nonetheless demonstrated that it is committed to online video – and that it is willing to put even more money behind the effort. Just late last week, Google picked up Widevine Technologies.

As my colleague Jim Davis notes, Widevine gives Google technology used to underpin both online and broadcast premium TV services through the use of software-based DRM systems. This means the company – with its recently launched Google TV product, as well as Android-powered phones and laptops running Chrome – will be able to offer secure premium content on any of these platforms and enable subscription and video-on-demand services, as an example.

For instance, YouTube could now charge for access to live events that it has broadcast on occasion, including a U2 concert last year and the Indian Premier League cricket matches this year. Until recently, YouTube had used CDN services from Akamai for live broadcasts. But just in the past few months, YouTube has started testing its own live-streaming services platform (and has hired a number of former Akamai employees to boot). If Google continues to develop a secure and scalable content delivery platform, CDN vendors may well feel the pinch.

Juniper back in the market — and how

Brenon Daly

Contact: Brenon Daly

Just nine months after Juniper Networks picked up a small stake in Altor Networks through the startup’s second round of funding, the networking giant decided Monday to take home the whole thing. Juniper will hand over $95m in cash for the rest of the virtual firewall vendor. (Altor had raised around $16m in backing, including the undisclosed investment from Juniper.) At the time of the investment, Juniper said it planned to develop an ‘even closer’ relationship with Altor, its primary virtualization security partner. See our full report on the deal.

The purchase of Altor stands as Juniper’s fifth acquisition this year, and brings its M&A spending to almost $400m so far in 2010. That’s fairly remarkable activity, considering that Juniper had been out of the market for a half-decade. And with the exception of its recent pickup of Trapeze Networks, Juniper’s buys have been big bets on small companies. The networking giant has paid $70m-100m each for Ankeena Networks, SMobile Systems and Altor – and we gather that all three of the target companies were running in the single digits of millions of dollars.

Recent Juniper acquisitions

Date Target Deal value Rationale
December 6, 2010 Altor Networks $95m Virtualization security
November 18, 2010 Blackwave (assets) Not disclosed Internet video content delivery
November 16, 2010 Trapeze Networks $152m Wireless LAN infrastructure
July 27, 2010 SMobile Systems $70m Mobile device security
April 8, 2010 Ankeena Networks $69m Online media content delivery

Source: The 451 M&A KnowledgeBase

Laying out a dual track for Conerstone

Brenon Daly

Contact: Brenon Daly

If current IPO candidate Cornerstone OnDemand is looking for a company to model itself on – at least in terms of the offering and after-market trading – it could do a lot worse than SuccessFactors. Both vendors sell human capital management (HCM) software, and both sell it on a subscription basis. Further, both companies were relatively small (sub-$40m in revenue) and running deeply in the red when they put in their paperwork. Not that it has mattered in the case of SuccessFactors. Shares in the company have tripled from the offer price, giving it an eye-popping market valuation of $2.3bn.

Whether Cornerstone will enjoy an equally remarkable run as a public company remains to be seen. (The company, which initially filed in September, would probably be looking at pricing in the first half of next year.) But in a recent report, we wonder if Cornerstone will even make it to the Nasdaq at all. The reason? The M&A market for HCM vendors has been hot lately. Spending on deals in the market so far this year is running at three times the level of both 2008 and 2009. And valuations, for the most part, continue to come in at above-market multiples.

In the report, we speculate on two potential buyers: one that’s obvious (ADP) and one that’s more of a stretch (salesforce.com). Cornerstone has some traits that would clearly appeal to both, as well as some that make a trade sale to either would-be acquirer less likely. ADP, which has already purchased a half-dozen HCM providers, currently has a five-year reselling agreement with Cornerstone, and even holds rights to some warrants in the startup. However, a closer reading of Cornerstone’s prospectus indicates that the early returns from that reselling arrangement haven’t been encouraging, with the two sides feuding over whether or not ADP has hit the agreed-upon sales targets and is, therefore, entitled to warrants that could be worth several million dollars.

Unlike ADP, which has a demonstrated interest in and appetite for HCM deals, salesforce.com is a much more speculative buyer for Cornerstone. But it’s a pairing that is perhaps not as farfetched as it might seem. After all, salesforce.com has long said that it wants to be relevant to all employees at a business, not just to those in sales. Buying Cornerstone would immediately give salesforce.com a high-profile presence in the HCM market, opening up an opportunity that far exceeds its core CRM market. Of course, a major acquisition like this would go against the direction that salesforce.com has taken as an open, all-inclusive platform provider.

Tech M&A slumps toward the year-end

Brenon Daly

Contact: Brenon Daly

Tech M&A appears to be heading toward a quiet end to the year, with November marking the third straight month of declining spending on deals. The slump puts the value of deals announced in the just-completed month at about half the level we were recording in the months earlier this summer. Overall, we tallied 252 deals worth $11.2bn. (And as a side note to the total, we would highlight the fact that the spending in November was highly concentrated. A trio of deals – EMC’s purchase of Isilon, the Novell buyout and Oracle’s reach for Art Technology Group – accounted for nearly half the value of all transactions announced last month.)

It’s not just that November slipped when compared to other months this year. The paltry $11.2bn in aggregate M&A value is just one-third the level recorded in November 2009, and is even lower than the total in November 2008, when the economy was in the grips of the worst economic recession in 70 years. In fact, spending for the just-completed November is coming in at about half the average level for the month over the past four years.

As to what this means for tech M&A in 2011, we’re turning to the people who will be striking the deals next year. In the next day or two, we’ll be sending out our annual survey for corporate development executives and tech investment bankers. The surveys cover forecasts for M&A activity, as well as valuations. Anyone interested in filling out the survey (a quick, painless and confidential process), just email me and I’ll send along the appropriate survey. For those who receive the survey in their inboxes soon, we would appreciate 5-10 minutes of your time to get your views on where the M&A market is heading next year.

SAP’s ‘dilutive’ deal and larger M&A implications

Brenon Daly

by Brenon Daly, China Martens

The jury’s decision to order SAP to pay $1.3bn to Oracle for stealing software and support material stands as the largest award for the theft of IP in the software industry. (As one banker deadpanned: “I think the TomorrowNow acquisition is dilutive.”) But the implications of the three-week trial extend far beyond the monetary settlement, as whopping as it is. From our perspective, the key part of the courtroom drama has been just how deeply the pair has relied on M&A to radically overhaul their businesses.

A half-decade ago, SAP figured that one of the easiest ways to hurt Oracle was to spend $10m for TomorrowNow (TN). Back in January 2005, the rationale for the TN deal made sense: buy a way of potentially siphoning off some of the rich maintenance stream that Oracle collects for supporting its ERP and CRM software. That was a key concern for SAP at the time, because it was still primarily hawking rival ERP and CRM products. The German giant had largely stayed out of the M&A market, preferring just to acquire small pieces of technology.

That changed dramatically three years ago, when SAP reached for Business Objects – its first major move beyond its core market. It stretched even further this summer with the $5.8bn purchase of Sybase. That acquisition brought SAP into several emerging markets, including mobile applications and some very promising in-memory analytics technology. The deal also represented a long-term shot at Oracle, as SAP now has a database to sell against Oracle rather than simply standing back and watching most of its ERP and CRM software run on Oracle, which has roughly half the database market.

If anything, Oracle has changed itself even more dramatically since then through acquisitions. It certainly has done a lot of them, announcing some 66 deals valued at a total of more than $30bn since SAP announced its tiny pickup of TN. Oracle has consolidated broad swaths of the software industry, including CRM, product lifecycle management, middleware, content management, as well as making a push into a handful of key vertical markets. Add to that Oracle is now in the hardware business, selling servers and storage along with other new businesses it picked up with its purchase of Sun Microsystems.

A severe case of buyer’s remorse for SAP

Brenon Daly

Contact: China Martens

Hindsight is a wonderful thing. Would SAP still have gone ahead with the $10m January 2005 purchase of fledgling third-party apps support player TomorrowNow (TN) had it had any inkling then of the financial cost more than five years later (a $1.3bn payout to Oracle and a ton of legal fees), as well as the dent to its previous sterling reputation? TN was always a loss-making business for SAP and at its height attracted less than 400 customers, a tiny proportion of the tens of thousands of Oracle apps customers.

SAP had been hoping to only have to pay out $40m over the intellectual property theft case that Oracle initiated against its bitter ERP and CRM foe and its TN business back in March 2007. Oracle alleged that TN, with SAP’s knowledge, had engaged in ‘massive theft’ of its software and related support materials through a series of illegal downloads with TN staff using customer passwords to access Oracle’s technical support websites for its JD Edwards, PeopleSoft and Siebel families of ERP and CRM apps. TN had then allegedly used the stolen materials to support its customers, offering them support at 50% less than Oracle’s rates.

More recently, SAP set aside $120m, but had in no sense been prepared that the jury would find so strongly in favor of Oracle, which had been looking for $1.7bn or more. SAP is set to appeal and ‘pursue all its options’ to reduce the award. This whole saga is far from ended – already, it’s been the stuff of Silicon Valley soap operas, with Oracle CEO Larry Ellison speaking out against new Hewlett-Packard CEO Leo Apotheker, a former CEO of SAP, and failing to serve a subpoena on him in a bizarre take on the video game Where in the World Is Carmen Sandiego?

Over the course of the case, Oracle had sought to continually expand the scope of the lawsuit, while SAP had tried to limit its focus. A few months into legal proceedings, SAP had admitted to some inappropriate downloads of Oracle material at TN, but shortly before the trial began, it decided not to contest contributory infringement, effectively contradicting earlier assertions that SAP executives didn’t have knowledge about what was going at TN.

The jury decision in favor of Oracle could well have a chilling effect on the remaining third-party support market. It’s one that never took off to the degree that its advocates had been expecting. In January, Oracle filed suit against the leading third-party support vendor, Rimini Street, which is headed by a cofounder of TomorrowNow. The suit was very similar in tone and scope to the TN one, but went into less specifics. It’s going to be interesting to see what happens now, since Rimini Street has been gearing up for a legal battle of this sort for some time.

Much has changed since SAP bought TomorrowNow, a unit it put up for sale, and, after finding no buyers, shuttered in October 2008. The move was triggered by Oracle’s multibillion-dollar purchases of ERP and CRM players PeopleSoft and Siebel. The widespread expectation was that Oracle would push those acquired customer bases to adopt its own E-Business Suite apps, but there was no large user exodus and Oracle has delivered new versions of its purchased apps. Indeed, Oracle has also tempered its big push around a new generation of apps, dubbed Fusion, with the initial release due next year.

So, customers in general are under much less pressure to migrate from the apps they’re currently using. At the same time, those same users are facing increased maintenance fees, which are a steady revenue source for both Oracle and SAP. It’s effectively at present in both companies’ interests to have no third-party apps support market. It will be interesting to see whether each of them revisits the concept to be one where they could have some revenue involvement. Over time, each player will face having to support a wider and wider variety of apps, versions and deployments, and they may find that taxing on their resources and therefore not as lucrative as in the past. Both companies are keenly aware of the gradual wearing-away impact of the SaaS apps market, where maintenance fees are substantially less or are factored into the cost of per-user, per-month subscriptions.

Buyouts are back

Brenon Daly

Contact:  Brenon Daly

The pending take-private of Novell underscores just how much private equity (PE) activity has rebounded since the Credit Crisis nearly shut down tech buyouts. The $2.2bn purchase of infrastructure software and SUSE Linux vendor Novell stands as the seventh PE tech deal so far this year valued at more than $1bn. That’s up from five big-ticket transactions in all of last year and only four in 2008.

What’s behind the buyout boom? The reopened debt market has allowed PE shops to make bigger bets once again. Consider this: With still more than a month left to go in 2010, PE firms have already tallied 264 deals valued at $30.2bn. The spending level is 50% higher than in all of 2009 and tops 2008, as well.

Also adding to the spending totals is the fact that targets are getting richer valuations. We’ve seen a trio of large leveraged buyouts (LBOs) go through this year with enterprise values of 4 times sales or even higher. However, that’s not the case with the latest LBO for Novell. Cash-rich Novell is garnering an enterprise value of $1.2bn, or just 1.5 times sales. Still, Novell’s LBO price is about 50% higher than where the company was valued at the start of the year.

PE Activity

Year Deal volume Deal value
YTD 2010 264 $30.2bn
2009 301 $19.7bn
2008 249 $24.8bn
2007 305 $118.4bn

Source: The 451 M&A KnowledgeBase