Category: technology stocks

Not pretty, but it’s done at Novell

Brenon Daly

Contact: Brenon Daly

After holding out for more than eight months, Novell finally accepted on Monday a $2.2bn buyout offer from private equity-backed Attachmate. From the outside, it looks like a case where the buyer – or maybe more accurately, the hedge fund that put the company in play – simply wore down Novell. Under terms, Attachmate will hand over $6.10 in cash per share, or roughly $2.2bn, for Novell.

Yet if we step back and look at the offer, we can’t help but notice that the company is now embracing a bid that only values it slightly more than the original offer that put it in play. For the record, Novell’s board said three weeks after receiving the unsolicited bid from gadfly investor Elliott Associates that the offer of $5.75 for each share ‘undervalues’ the company and its prospects.

Apparently, Elliott’s opening bid wasn’t all that lowball because the company is selling for just 6% more than the offer that ‘undervalued’ it. We would also mention that Novell traded above the $6.10 bid several times over the summer, albeit on pure speculation. (JP Morgan Securities advised Novell, while Credit Suisse Securities and RBC Capital Markets worked for Attachmate.) The deal is expected to close in the first quarter of 2011, pending shareholder approval.

To be fair, the fact that Novell’s board got shareholders even a slight bump above the original offer should be viewed as a sell-side accomplishment. After all, Novell is a hoary, mixed-bag of businesses, with each unit attracting specific suitors. All of that made for an undoubtedly complicated process, with multiple permutations on bidders and bidding teams, as we understand it. (Companies we heard that may have taken a serious look at some point at Novell – or at least some of its businesses – include VMware and Oracle, among others.) Indeed, as part of the transaction, Microsoft will be acquiring a sprawling portfolio of 882 patents from Novell for $450m.

And beyond all of the complications around matchmaking is the fundamental fact that Novell just isn’t that attractive, regardless of whatever business we look at inside the company. Each component of its revenue (license, maintenance/subscription, services) has dropped so far this year, which is part of the reason why Novell has come up short of Wall Street expectations every quarter this year. Overall, sales have dropped 6% in 2010, and current projections call for Novell’s revenue to decline next year, too. So as we look at it, the board probably did a fair job to get Novell valued at $1.2bn (net of cash), which works out to basically 1.5 times sales. Novell shareholders will now have their say on the outcome of the more than eight-month process.

Ariba ‘mines’ for its latest deal

Brenon Daly

Contact: Brenon Daly

After three years out of the market, Ariba returned to M&A on Thursday with the $150m purchase of Quadrem. Both the current deal and the previous one help bolster the supply-chain vendor’s offering in new markets. In the case of Procuri, which was acquired in September 2007, Ariba picked up a company that was targeting small businesses. With its latest transaction, Ariba adds an offering geared for corporate giants, specifically some of the largest mining companies on earth. It also gets further into markets outside the US.

Quadrem was founded 10 years ago, and is still majority owned by a quartet of multinational mining giants (BHP Billiton, Anglo American, Rio Tinto and Vale SA). While sales to mining companies accounted for essentially all of Quadrem’s revenue in its early days, the vendor diversified into other industries in recent years. Currently, mining generates about half of Quadrem’s revenue, with the other half coming from other industries such as oil and gas as well as manufacturing.

Under terms of the deal, Quadrem’s four principal companies have extra incentive to keep using Quadrem even after the sale to Ariba closes, which is expected by next March. The reason: Ariba has held back $25m in payment and will kick in another $25m to the four companies as long as they are still using the network three years from now. Ariba says it expects to pay out the full amount. (Morgan Stanley advised Ariba on its purchase.)

Assuming that Ariba does indeed hand over the full $150m, the transaction would value Quadrem a smidge above two times this year’s projected sales of about $70m. For its part, Ariba trades at more than twice that valuation. It currently garners a market cap of about $1.7bn, compared to projected sales for calendar 2010 of about $370m. Incidentally, since Ariba last announced an acquisition three years ago, its shares have basically doubled while the Nasdaq has flatlined.

Exits lead up and down for General Catalyst

Brenon Daly

Contact: Brenon Daly

Talk about a mixed pair of exits. Venture firm General Catalyst Partners is faced with an unusual situation of the sale of one portfolio company almost undoubtedly slashing the valuation of another portfolio company that just filed for an IPO. The trade sale could even derail the offering, although that’s probably not likely.

The specifics: Boston-based General Catalyst (and more specifically, partner Joel Cutler) has backed both ITA Software, a maker of flight search tools, and Kayak.com, an online travel site. In July, ITA agreed to a $700m sale to Google (although the close of the deal has been hung up by concerns over the search giant potentially having too much influence in the flight search market). And then just this week, Kayak.com put in its paperwork to go public. General Catalyst is the single largest owner of Kayak.com, holding about 30% of the equity.

The rub in the two exits comes because Kayak.com relies heavily on ITA for sending business its way. (According to the prospectus, ITA has accounted for 42% of airfare query results so far this year.) Of course, Google would have every reason not to continue to send that search traffic to Kayak.com if the ITA purchase goes through. So for General Catalyst, it would be nice to pocket the proceeds from a $700m sale of ITA, but probably not if it comes at the cost of Kayak.com’s valuation.

Trapeze’s long road to an obvious home

Brenon Daly

Contact: Brenon Daly

Two and a half years after a head-scratching sale to an unexpected buyer, Trapeze Networks has finally landed where it pretty much should have gone in the first place: Juniper Networks. The networking giant said Tuesday that it will hand over $152m in cash for the WLAN gear maker, with the deal expected to close before the end of the year. The price is actually $19m (or 14%) higher than Trapeze fetched in its sale in June 2008 to Belden. (That’s a reversal from most divestitures, which typically return dimes on the dollar compared to the original acquisition price.)

Trapeze’s combination with Belden was a bit puzzling from the start, so it’s not surprising to see the company, which is primarily known for its wiring products, unwind its purchase of a wireless vendor. In fact, it’s only surprising that Trapeze went through a period of ownership at a company other than Juniper. After all, Juniper had an OEM arrangement with Trapeze and even put money into the startup’s series D round of funding. We gather that Juniper was close to taking home Trapeze before it sold to Belden, but the two partners got snagged on a final price.

Since Trapeze sold for the first time, there have been a handful of exits for other WLAN providers. Most notably, Colubris Networks got snapped up by Hewlett-Packard and Meru Networks actually made it to the Nasdaq. Meru went public at $15 per share, which has been basically the midpoint of its trading range since its debut in late March. The stock also currently trades at about $15, giving Meru an equity value of roughly $240m, or about three times 2010 sales. Incidentally, Bank of America Merrill Lynch both led Meru’s offering and advised Juniper on its pickup of Trapeze.

Blue-sky thinking on a bidding war for Isilon

Brenon Daly

Contact: Brenon Daly

Based on the two previous multibillion-dollar deals in the storage industry, we should be bracing for a bidding war around Isilon Systems. Recall that Data Domain last year and 3PAR this summer each attracted after-the-fact suitors that drove up the price on both by more than a few dollars. But in the case of Isilon, we don’t actually see the process going to a public auction.

For starters, there’s the not-insignificant matter of the buy-in bid, which currently values Isilon more richly (on a price-to-sales ratio) than either Data Domain or 3PAR. (As we note in our full report on EMC’s planned purchase, Isilon is being taken off the market at its highest-ever price, roughly five times the level where the company started the year and roughly twice where it traded just three months ago.)

Setting aside Isilon’s acrophobia-inducing valuation, which company could we imagine putting in a topping bid? Admittedly, that requires a rather vivid imagination, but one name we could come up with is Dell. (My colleague, Henry Baltazar, looked at Isilon and other potential targets for Dell in a recent report.) The company has already demonstrated a willingness to spend big to build out its storage portfolio, taking home EqualLogic three years ago and making an unsuccessful run at 3PAR this summer. (If nothing else, Dell’s effort to land 3PAR signaled that the tech giant doesn’t appear content to simply continue its long-term reliance on EMC for storage business. We suspect that marriage of convenience may well be on the rocks.)

Not that we necessarily expect it to happen, but Isilon would nonetheless bring Dell a fast-growing storage vendor (roughly 60% revenue growth for 2010) and a solid roster of more than 1,500 customers, which is roughly twice the number it would have picked up with 3PAR.

Granted, there would be some overlap with the NAS technology Dell obtained with Exanet earlier this year. But Isilon would significantly enhance that, as well as fit well with Dell’s more recent storage purchase, Ocarina Networks. (Isilon and Ocarina actually had a partnership, putting Ocarina’s digital image de-duplication technology in front of Isilon. That’s particularly useful for storage requirements for media and entertainment companies, which account for one-third of revenue at Isilon.) Again, we highly doubt that Dell plans to start a bidding war for Isilon. But it’s enough to get us thinking.

Isilon and 3PAR: strikingly similar storage sales

Brenon Daly

Contact: Brenon Daly

EMC’s planned purchase of Isilon Systems comes as the second storage acquisition valued at more than $2bn in just three months. In fact, it lines up rather closely on a number of fronts with the other recent big-ticket storage deal, Hewlett-Packard’s pickup of 3PAR. For starters, the adviser. Qatalyst Partners got sole print for helping to sell 3PAR, and also had a hand in the process for Isilon. (Morgan Stanley and Qatalyst teamed up on the sell side.)

In terms of financial results, both Isilon and 3PAR are very similar. The two vendors were both generating about $200m in trailing revenue and only modest amounts of cash flow at the time of their acquisitions. (Both also had slightly more than $100m in cash on hand, thanks primarily to their recent IPOs.) That means both Isilon and 3PAR secured a valuation of more than 10 times trailing revenue in their sales to EMC and HP, respectively. If anything, Isilon is garnering an even richer valuation at 12.8x trailing 12-month sales and 8.7x projected 2011 sales.

And finally, both Isilon and 3PAR are being taken off the market at their highest-ever valuations, with acquisition offers of about $33 for each share. (That was the exact clearing bid for 3PAR, which came after two rounds of bumped bids, while Isilon shareholders are set to pocket $33.85 for each of their shares.) Given that Isilon and 3PAR were trading in the single digits just a few months before their acquisitions, shareholders in both storage vendors have reason to smile.

Making a middleware mini-mammoth

Brenon Daly1 Comment

Contact: Brenon Daly, Dennis Callaghan

Imagine combining Informatica and TIBCO Software into a middleware mammoth. Now, shrink the scale by almost 100. Move it from the US to Europe. And make it open source rather than proprietary software. In a roundabout way, that’s what we see in Talend’s recent acquisition of SOPERA. At least in part.

Since its founding in 2005, Talend has focused on offering an open source alternative to Informatica. (As we noted earlier this week, Informatica is a rather rich target. The data-integration vendor currently garners its highest price in a decade, valuing it at roughly 6 times projected 2010 sales.) Talend has enjoyed a good deal of success, doubling revenue last year and likely to finish next year with sales of roughly $50m, according to our understanding.

In addition to its core data integration, Talend also provides a data management suite combining master data management, which it snagged via the acquisition of Amalto Technologies in September 2009, and data quality. Now, it will also be serving up SOPERA’s application integration, where TIBCO is probably the best-known vendor. For its part, SOPERA has a much more modest business than its acquirer, claiming 60 customers, compared to the 1,500 paying customers that Talend has. SOPERA was actually founded inside the IT department of Deutsche Post a decade ago.

Though small, the purchase of SOPERA is nonetheless significant. As my colleague Dennis Callaghan has indicated, Talend now has a more compelling story to tell in open source middleware, especially as more enterprises take advantage of hybrid cloud environments, with applications running in private and public cloud environments that need connectivity and data sharing between them

Reading Cisco’s signals

Brenon Daly

Contact: Brenon Daly

As a bellwether for the tech industry, Cisco Systems laid out a fairly bearish outlook for Wall Street in its report on fiscal first-quarter results. The projections of lower-than-expected revenue at the networking giant trimmed some $20bn from its market value Thursday, and helped dragged down the Nasdaq, which has tacked on 6% over the past month. But from our perspective, Cisco is not just a key indicator for the equity market – it’s also a key indicator for the M&A market.

Looking more closely at the company’s fiscal Q1 report, we can’t help but be struck by Cisco’s paltry M&A spending. During the August-October period, the company handed over a total of just $69m (net of cash at acquired companies) for its purchases of ExtendMedia and Arch Rock. (Specific terms on both deals weren’t disclosed.)

While that may sound like a lot of money, it’s pocket change to Cisco, which generated $1.7bn in cash flow from operations in the quarter. Or more dramatically, consider this: during Q1, Cisco spent $2.5bn on share repurchases. That means it spent more than 35 times more on its own equity than on the equity of other companies.

Not that Cisco has been alone in staying out of the big-ticket M&A market recently. We noted that October (the final month of Cisco’s fiscal first quarter) was the first month of 2010 that a tech company didn’t announce a single transaction valued at more than $1bn. Obviously, that streak was broken last week, when Oracle said it was spending $1bn for Art Technology Group. Still, it was only Oracle’s second significant acquisition of the past 18 months.

An acquisition breaks the back of Bakbone

Brenon Daly1 Comment

Contact: Brenon Daly

In some ways, it was a misguided purchase last year by BakBone Software that led to yesterday’s distressed sale to Quest Software. The backup and recovery vendor made its largest-ever acquisition in May 2009, paying some $16m in cash and stock for ColdSpark. The rationale of the combination seemed sound at the time: broaden BakBone’s data-protection platform by adding ColdSpark’s messaging management. What could go wrong with that?

Unfortunately, plenty went wrong, as the two businesses never meshed. BackBone relies heavily on its indirect sales channel, while ColdSpark sold directly into enterprises. The average sales price for the messaging software was significantly higher than BakBone’s core storage products, which made for a highly unpredictable sales cycle at the acquired business. In the roughly one year that it owned ColdSpark, BakBone recorded only $1m in revenue from the business, according to SEC filings. It shuttered ColdSpark last May.

The integration struggles, however, came at a steep cost to BakBone, a Bulletin Board-traded company where cash has always been tight. Consider this: to generate the roughly $1m in sales at ColdSpark required spending of more than $3m in just R&D and sales/marketing efforts, to say nothing of the additional costs at the business. The spending drained BakBone’s treasury to just $5m, as of the company’s latest quarterly report.

Obscured by the smoke from the flameout around the acquisition is the fact that BakBone’s core storage management business actually puts up pretty decent numbers. In the latest fiscal year, it has run at a respectable 91% gross margin and 13% operating margin, while sales increased 9%. It boasts more than 17,000 customers. And Quest is getting all that for a relative bargain, paying just 1x sales for BakBone. As a final note on the deal, which is expected to close early next year, we would add that BakBone stands as the only public company we’re aware of that Quest has ever acquired

The rich valuation of integration

Brenon Daly

Contact: Brenon Daly

A lot of attention (and the accompanying financial rewards) around data management has tended to pile up in security, storage, analytics and other well-known market segments. Rather quietly but consistently, data integration has joined the list of richly valued markets as customers use these offering to get at the massive stores of information that run their businesses. The premium valuation is showing up both on Wall Street and, just recently, in M&A, too.

Take the case of Informatica. Shares of the data-integration provider have nearly doubled over the past year, and currently fetch their highest price in a decade. Informatica currently trades at a $3.8bn market capitalization, a rather rich six times its projected 2010 sales of $640m. The company has always stressed that part of its value has been in its independence among the software giants, but Informatica has nonetheless attracted M&A speculation in the past.

Those highly valued (and highly visible) public market vendors have helped drive up the valuation of smaller data-integration startups. For instance, we estimate that IBM paid about $200m for Cast Iron Systems, which we understand was running at about $30m in sales. And just last week, Dell reached for Boomi in a deal that valued the company at more than twice that multiple. (Subscribers can see our full report, which includes our estimates on the revenue as well as the price of Boomi.)