Category: technology stocks

Software AG does a bit of MDM shopping of its own

Brenon Daly

Contact: Brenon Daly, Dennis Callaghan, Krishna Roy

A little more than a year after scrapping its OEM agreement with master data management (MDM) vendor Orchestra Networks, Software AG has picked up its own MDM and data-governance technology. The German company recently reached across the Atlantic for Data Foundations, which we gather was a small purchase of a startup generating less than $10m in sales. Nevertheless, the deal continues the recent consolidation in the MDM market, which has seen fellow big-name buyers such as IBM, Informatica and TIBCO Software make acquisitions here.

A bit of a wonky area of information management, MDM has increasingly become a complementary tool for application integration and business process management software as it helps to make sense of the many different data types that underpin these applications. Further, other rival players have taken a platform-based approach to MDM, combining data-integration and data-quality capabilities into the MDM mix.

We wonder if Software AG will follow suit and enter the MDM platform fray by pairing the Data Foundations buy with another MDM-related purchase. If it looks to do that, we wouldn’t at all be surprised to see Software AG add a data-quality provider to its portfolio. A few names that might be worth a look for the acquisitive German company are Datanomic, DataLever, DataMentors, Datactics, Clavis Technology and Human Inference.

Ulticom’s shareholders cash out

Brenon Daly

Contact: Brenon Daly

Cash is king. We got a reminder of that tried-and-true business adage when we were skimming the terms of Ulticom’s sale to buyout shop Platinum Equity earlier this week. While the pending take-private is hardly a regal outcome for shareholders of the telecom software provider, the structure of the deal helps them get a bit more back from the business than they would have otherwise.

According to terms of Tuesday’s buyout, Platinum will pay $2.33 for each of the roughly 11 million shares outstanding at Ulticom. That works out to about $26m of equity consideration for the company. Far more important, however, the buyout shop will hand back roughly $64m of Ulticom’s $77m in cash to shareholders. This is actually a rare case of a cash ‘rebate’ being pocketed by the existing owners of a business (shareholders) rather than the soon-to-be owners. The bid works out to an enterprise value for Ulticom of about $16m, for a business that was likely to do around $38m in revenue in the current fiscal year.

Further, this is actually the second time that Ulticom has parceled out its cash. A bit of background: Ulticom is majority owned by Comverse Technology. The scandal-tainted company acquired Ulticom in 1996, which then spun off a chunk in a public offering in April 2000. That offering – along with a secondary shortly afterward – gave Ulticom way more money than it could ever use. While the company was sitting on a mountain of cash, interest in it was muted because Ulticom had to restate several years worth of financial filings because of options grants and revenue recognition issues. Those concerns pretty much sank Ulticom’s M&A plans in 2008, when it was being advised by Jefferies & Company.

Last year, however, Ulticom got itself back together. It settled with the SEC, got relisted on the Nasdaq and even threw a bone to long-suffering shareholders, paying out $200m in cash through a dividend. (Part of the reason Ulticom emptied out its treasury, we suspect, is to make it more attractive to private equity firms, which wouldn’t have to write such a large check for the company.) The move paid off for Ulticom, not to mention its shareholders. Morgan Keegan Technology Group (the former Revolution Partners) advised Ulticom on the deal, which is expected to close by January

Is GeoLearning the next to go?

Brenon Daly

Contact: Brenon Daly

While the employment market may still be sluggish, the market for software that helps companies with their employees is bustling. We recently noted that both the number of deals and spending in the human capital management (HCM) market so far this year is rivaling the records set when the overall M&A market was much healthier. Add to that, there’s even an HCM vendor that’s eyeing the other exit: Cornerstone OnDemand filed to go public two weeks ago, one of the few tech companies that’s willing to brave the chilly IPO market.

As to what’s the next likely deal in the HCM market, recent indications have pointed toward a sale of GeoLearning. (We understand that the Des Moines, Iowa-based company has retained Raymond James & Associates to advise it on a process.) Founded in 1997 by current CEO Frank Russell, GeoLearning sells its learning management software (LMS) through both a hosted and on-demand model to more than 700 customers. In February 2008, GeoLearning took in its first and only institutional money – a $31m investment from Volition Capital, which was known as Fidelity Ventures at the time.

A little more than a month ago, fellow LMS startup Learn.com got snapped up by Taleo for $125m. Sources have indicated that ADP may have been the initial bidder for Learn.com, looking to add to the half-dozen HCM acquisitions the services giant has already done. We would expect ADP to at least look closely at GeoLearning. But from our perspective, the more likely acquirer for GeoLearning is SuccessFactors. The two companies have had an integrated offering on the market for more than four years, and continue as close partners. We gather that GeoLearning is slightly larger than Learn.com, which was running at about $30m in sales.

Internet infrastructure in Q3: a dip in deal volume

Ben Kolada

Contact: Ben Kolada

In the just-closed quarter, we noticed a slight dip in the number of announced deals. In fact, the deal volume has continued its slide ever since the industry hit its peak in the first quarter of 2010. That’s not to say that our readers should make like Equinix’s investors and run for the exit. True, deal volume did slide downward, but the brand names of the Internet infrastructure industry continued to make long-term investments.

The total number of transactions announced in the third quarter declined 13.5% from the second quarter and 27.3% from the first quarter of the year. However, we must note that Q1 deal volume was, in fact, artificially inflated somewhat as some deals that were put on hold during the worst part of the recession in 2009 were finally closed in Q4 2009 and the beginning of 2010 due to renewed optimism in the economy and the ability to once again access capital at reasonable rates.

Overall, the number of transactions is up year over year, with Q3 2010 yielding 23% more transactions than the year-ago period. In fact, the total number of deals announced in the first three quarters of this year has already topped the full-year total for 2009. Furthermore, well-established names in the Internet infrastructure sector, including Digital Realty Trust, Limelight Networks and TeleCity on the industry side and GI Partners, Sequoia Capital and Welsh, Carson, Anderson & Stowe on the investment side, just to name a few, came to the table in the third quarter. We’ll take a deeper look at Q3 deal volume in a report that will be included in tonight’s Daily 451 sendout.

Recent quarterly deal flow

Period Number of transactions Percent change from previous quarter
Q1 2009 12 –
Q2 2009 17 42%
Q3 2009 26 53%
Q4 2009 28 8%
Q1 2010 44 57%
Q2 2010 38 -14%
Q3 2010 32 -16%

Source: The 451 M&A KnowledgeBase, Tier1 Research

Sonic Solutions-DivX: a big swing back to the same place

Brenon Daly

Contact: Brenon Daly

The market giveth and the market taketh away. While the giving and taking are usually lopsided, there are rare occasions when it does balance itself out. Consider the recent swings in Sonic Solutions. The company announced the largest deal in its history, the $325m acquisition of DivX, on June 2. Along with the purchase, it also warned that financial results for the quarter were going to be a bit light. That started a slide in shares of Sonic Solutions that had lopped off 40% of the company’s market value by July.

The pain of that slide wasn’t lost on shareholders of DivX. The reason: roughly two-thirds of the consideration for their company was coming in the form of Sonic Solutions stock, with the remaining one-third in cash. (We noted near the bottom of the stock’s slide that the decline had cut the purchase price of DivX by about $50m, or 15% compared to the original offer price.)

But by the time the transaction had closed last Friday, shares of Sonic Solutions had regained the ground they had lost in the four months since the deal was announced. In fact, Sonic Solutions closed Friday at almost exactly the same price it did the day before the company announced the acquisition. So from the perspective of DivX, it was almost like nothing at all happened this summer.

Talk is cheap, but BMC isn’t

Brenon Daly

Contact: Brenon Daly

All the talk around an acquisition of BMC may be just that – talk. We have a hard time believing some of the rumored buyers for the IT management vendor. That skepticism was shared by a few bankers who we spoke with about the rumor. In fact, they reminded us that the most recent M&A buzz around BMC had the company as a buyer, not a seller. Several sources have indicated that BMC was an early bidder for security provider ArcSight, but dropped out quickly when the price got a bit rich.

Nonetheless, M&A speculation pushed BMC shares Thursday to their highest level in a decade. Currently, the company garners a market cap of $7.6bn. Fittingly for a 30-year-old firm, BMC sits on a pile of cash. It has some $1.4bn in its treasury, although a bit of debt lowers its net cash position to about $1.1bn. The company recently indicated that it would generate in the neighborhood of $700m in cash from operations in the current fiscal year, which ends in March. Sales for the fiscal year are expected to come in at $2bn.

With an enterprise value of roughly $6.2bn, BMC currently trades at more than 3 times projected sales and almost 9x projected cash flow. Even without a take-out premium, those are fairly rich multiples for a company that grows just 2% per year. A premium could take BMC’s equity value to around $10bn.

Obviously, there are only a few companies that could write that a check that big and if we were to short-list them we would probably put Oracle and Cisco Systems on there – but for different reasons. The $1bn of maintenance revenue that flows steadily to BMC each year would undoubtedly catch Oracle’s eye. But buying $1bn of annual maintenance revenue for, say, $8bn (on a net cost basis) doesn’t look like the kind of bargain Oracle typically strikes.

And while Cisco has partnered with BMC for the management within its Unified Computing System, it’s not clear to us that Cisco actually needs to own BMC to further its interest in outfitting datacenters. To our mind, Cisco should just put the money it would spend on BMC toward the company that it should really buy: EMC.

Third-quarter M&A: Forget the headlines

Brenon Daly

Contact: Brenon Daly

To get an accurate read on M&A this summer, you have to look past the headlines. Undeniably, there were a few high-profile deals, including the sale of McAfee in the largest deal ever in the security industry, as well as a high-profile bidding war that pushed 3PAR’s valuation into the double digits. Beyond those transactions, however, deal flow in the third quarter, which wraps today, has been distinctly average. Spending is coming in at $46bn, only slightly above the average spending of $40bn in the eight quarters since the Credit Crisis erupted.

The $46bn also sits at the midway point of spending in the first two quarters of the year ($30bn in Q1 2010 and $62bn in Q2 2010). It also nearly splits the difference between the previous year’s quarter ($38bn in spending in Q3 2009) and the previous quarter this year ($62bn in spending in Q2 2010). We’ll look at why the value of deals announced in late summer dropped one-quarter from the record level in early summer in a special report tonight, but for now consider this: Of the five largest transactions so far in 2010, just one was announced in the third quarter. Again, we’ll have a full report on Q3 M&A in tonight’s Daily 451 and 451 TechDealmaker sendouts.

Valuations separated by more than the Atlantic

Brenon Daly

Contact: Brenon Daly

Comparing the valuations of US tech companies with their European counterparts, we can’t help but notice the fact that the recovery hasn’t been enjoyed equally on both sides of the Atlantic. We noted a few months ago that the strong US dollar had opened the way for some opportunistic shopping on the continent. Although most European currencies have inched back up since then, there are still discounts available because the valuations of the companies are still lagging their US peers and rivals.

Earlier this summer, we pointed out that discrepancy in Deltek Systems’ purchase of Maconomy, which valued the Danish ERP vendor at twice the level it started the year – but still below Deltek’s current valuation on the Nasdaq. Similarly, Adobe acquired Day Software at a price that was four times higher than the Swiss company’s own valuation last summer. However, Adobe’s own valuation is higher than the take-out valuation for Day, which included a 60% premium. (Adobe is still valued higher, even though it lost 20% of its value Wednesday after forecasting weaker-than-expected results.)

But those deals pale in comparison to the arbitrage that OpenTable did in its reach across the Atlantic for toptable.com. OpenTable values the British restaurant reservation service at basically 6 times trailing sales, while the San Francisco-based company trades at 19x trailing sales. (For those of you who haven’t looked lately, OpenTable trades in the mid-$60 range, commanding a market cap of some $1.5bn. Incidentally, various measures of OpenTable’s valuation – specifically, both trailing and forward price to earnings ratio – line up almost exactly with those of salesforce.com.)

OpenTable booking seats at negotiating table in Europe

Brenon Daly

Contact: Brenon Daly

Often when a company takes its business to a foreign country, something gets lost in translation. EBay found that as it looked to expand its online auctions internationally, and on a smaller scale, OpenTable ran into some of that as well. Roughly two years ago, the San Francisco-based online restaurant reservation service pulled out of both Spain and France. Even now, OpenTable’s international operation contributes only about 6% of total revenue as it burns money.

So, perhaps the thinking in its recent transatlantic move is: If you can’t beat them, buy them. In its first acquisition for geographic expansion, OpenTable said last week that it will pay $55m in cash for toptable.com, a UK reservation site. (Frankly, we have been expecting a move across the ocean by OpenTable since its IPO.) OpenTable has had its offering in the UK since 2004, but the company has acknowledged that the UK is its most competitive market.

While the acquisition should help bolster its presence there, we should note that OpenTable operates in a very different way than toptable.com. OpenTable looks to replace a restaurant’s existing reservation book, which is typically a pen and some paper, with the company’s proprietary electronic reservation book. On top of that one-time installation fee, OpenTable then charges a monthly subscription fee as well as making money each time a diner sits down at a restaurant table that was booked through the service. In contrast, toptable.com – along with other services that use the ‘allocation’ model – simply moves some of the available reservations online, with reservations there then recorded in whatever system the restaurant is currently using.

One advantage that toptable.com has, according to OpenTable, is that its approach is ‘lighter’ in that it doesn’t require an upfront hardware purchase. OpenTable is considering taking toptable.com and its allocation approach back into continental Europe, where toptable.com had started to move. If that organic expansion from its inorganic acquisition doesn’t take off, look for OpenTable to buy again. Germany, where OpenTable has had operations since 2007, looks like another market where OpenTable might want to reserve a few seats at the negotiating table.

IBM and HP bag big game on M&A safari

Brenon Daly

Contact: Brenon Daly

With the news today that Hewlett-Packard is closing its recent pickup of Fortify Software, we wanted to take the opportunity to point out that the deal almost belongs in the minority of M&A moves HP has made so far this year. What are we talking about? Basically, that the tech giant has been doing giant deals. Of the seven acquisitions HP has announced so far in 2010, fully three of them have been valued at more than $1bn.

We noted in mid-April, which is before it inked any of its three 10-digit acquisitions, that HP had telegraphed to the market that it was going to do fewer transactions, but they were going to be bigger deals. (And we should add that its purchase of application security vendor Fortify wasn’t just a pocket-change deal. We understand that it paid $275m or so for the company.)

What’s interesting to note is that in the five months since we indicated that HP would be big-game hunting, one other company has joined it on safari: IBM. Big Blue has inked a pair of deals valued at more than $1bn since April – the pickup of AT&T’s Sterling Commerce business as well as Monday’s purchase of Netezza. Along the way, it has also done a steady flow of transactions valued at $150m-500.

Altogether, we calculate the tab for Big Blue’s five-month shopping spree at roughly $4.8bn for its nine acquisitions. (Incidentally, the amount of cash it spent is basically the same amount its business generated over that same period.) Meanwhile, HP spent about $1bn more ($5.8bn in disclosed or estimated deal values) on its seven purchases since mid-April. Taken together, these two companies have averaged about $2bn of M&A spending in each of the past five months. And they were sniping at each other about ‘buying’ R&D? Really?

M&A activity since mid-April 2010

Company Number of acquisitions Total M&A spending
HP 7 $5.8bn*
IBM 9 $4.8bn*

Source: The 451 M&A KnowledgeBase *Includes disclosed and estimated deal values