Category: technology stocks

A bit of Big Blue inconsistency

Brenon Daly

Contact: Brenon Daly

Perhaps Mark Hurd feels vindicated. No, we’re not referring to the former Hewlett-Packard chief executive settling a lawsuit with his old shop. Instead, we’re talking about IBM’s stunning flip-flop with regard to high-profile M&A by itself and rival HP. At the least, Big Blue’s recent comments now appear inconsistent; at the worst, they smack of hypocrisy.

The specifics: A week ago, Big Blue’s CEO was blasting HP for ‘overpaying’ for deals, and for relying on M&A rather than R&D. Ironically, Sam Palmisano made these comments just as his own company was putting the final touches on its acquisition of Netezza, a deal that values the data-warehousing vendor at nearly 7 times this year’s forecasted sales for the current fiscal year. That’s more than twice the median software valuation, and basically matches the valuation that HP is handing over for ArcSight.

Incidentally, both transactions valued the targets, which had only come public within the past three years, at their highest-ever valuations. But if we look at how the shares of ArcSight and Netezza have performed so far this year, it becomes very clear that IBM was the much more aggressive suitor. Excluding the pop ArcSight shares got when word of a deal leaked in late August, the security vendor’s stock had only ticked up about 10%. In contrast, Netezza stock had run 150% from January to the day before Big Blue announced its purchase.

A Big Blue move into the data warehousing market

Brenon Daly

Contact: Brenon Daly

A little more than three years after Netezza debuted on the NYSE, the data-warehousing vendor is being erased from the Big Board at basically twice its valuation at the time of its IPO. Under terms, IBM is handing over $27 in cash for each share of Netezza, which went public at $12 in July 2007. However, after the strong debut, which valued the company at around $1bn, gravity set in on Netezza shares. They spent most of 2008 and all of 2009 under the $12 offer price.

Earlier this summer, however, Netezza shares started running. The run was fueled by strong second-quarter results that saw total revenue surge 45%, as well as lingering M&A rumors. (We noted in early July that we had heard EMC was interested in Netezza before it opted for rival data-warehousing vendor Greenplum. IBM’s bid values Netezza at twice the level it was trading at the time.)

As Netezza shares continued climbing to new highs on the market, the move whittled away the premium Big Blue is offering. Compared to the previous day’s close, IBM is paying just a 10% premium for Netezza. But judged against where Netezza was trading a month ago, the premium is 80%. We would add that Netezza shares have traded above the $27 bid since the open Monday morning. UBS advised IBM, while Qatalyst Partners advised Netezza.

Based on the enterprise value of $1.7bn given by IBM, the offer values Netezza at 8.9 times sales in its fiscal year that ended in January. (As a trading comparison, Teradata currently garners a valuation that’s about one-third that level.) At the end of its second quarter, Netezza guided Wall Street to expect about $250m in sales for the current fiscal year, meaning IBM is paying 6.8x projected sales. While that is a relatively rich valuation, it’s much lower than rival EMC paid in its big data-warehousing purchase. We understand that it handed over $400m for Greenplum, which was running at about $30m in sales.

Is HP overcompensating?

Brenon Daly

Contact: Brenon Daly

Since when does an army without its top general go on the attack? That strategy would seem to go against convention, yet Hewlett-Packard has done just that since dumping Mark Hurd for his foibles. The tech giant has chased a pair of deals to valuations that are basically 2-3 times the prevailing market multiple. HP’s recent bidding war over 3PAR and the purchase of ArcSight shows a level of aggressiveness that indicates to us that the drivers for the acquisitions may have been emotional as well as financial, at least to a small degree.

If we step back and look at the setting for both deals, we can’t help but conclude that HP announced the transactions at a time when it looked vulnerable. Its star CEO had dramatically crashed back to earth, while its board (yet again) appeared to have bungled what looked like a fairly routine internal investigation. Statements by the company that it was ‘business as usual’ didn’t get much of a hearing on Wall Street. Shares that changed hands in the low $50s in April have been worth less than $40 for much of the past month. HP’s market cap lingers below $100bn, despite the company ringing up sales of about $120bn.

At the risk of drifting too far into psychology, we wonder if the deals weren’t a bit of overcompensation. (Certainly, paying 11x trailing sales for 3PAR might be considered overcompensation, or at the least, ‘heavy compensation,’ if you’ll forgive the pun.) If investors and others were going to view HP as weak or directionless while its corner office was empty, well, HP could use its vast resources to counter with a signal to remind everyone that it was formidable, with or without a fulltime CEO. Of course, we’re just playing armchair psychologist here. But something beyond just straight numbers seemed to be at work in HP’s recent moves.

A second exits gets ArcSight a 2x valuation

Brenon Daly

Contact: Brenon Daly

Hewlett-Packard’s pending purchase of ArcSight is the third IT security deal so far this year valued at more than $1bn, after not having a single security transaction valued in 10 digits in 2009. While the other two deals have gone off at basically market multiples, ArcSight is being valued at twice that level. The largest ESIM vendor agreed to sell itself to HP for $43.50 per share, valuing the security firm at more than four times the level it went public just two and a half years ago.

HP put the enterprise value of the transaction, which is slated to close by the end of the year, at $1.5bn. That means the tech giant is paying 7.5 times ArcSight’s trailing sales of $200m. (For the current fiscal year, ArcSight is expected to put up about $225m in sales, meaning HP is paying about 6.7x projected sales.) On a trailing basis, both McAfee and VeriSign’s identity and authentication business garnered 3.5x sales in their respective sales to Intel and Symantec. (Morgan Stanley advised both McAfee and ArcSight, while JP Morgan Securities advised VeriSign.)

The high-multiple deal represents a stunningly successful outcome for ArcSight. As we have mentioned in the past, both HP and McAfee approached ArcSight in the summer of 2007, ahead of the company’s IPO. We gather that both were bidders in the range of $600-750m. Unlike other dual-track candidates, ArcSight didn’t opt for the trade sale, but went ahead with its offering even as the equity market turned bearish. ArcSight spent virtually its entire first year as a public company trading in the single digits, including a fair amount of time below its offer price. (At one point when its shares were underwater, CA Technologies lobbed a low-ball bid at the firm, we understand.) If we had to guess at another suitor in the current process around ArcSight, we might tap EMC as an interested party.

Even as its stock took off over the past two years, ArcSight never did a secondary offering. (For a company with about $200m in sales, it has a very narrow base of shares, totaling only about 38 million.) In this case, the unwillingness to sell shares – either a small chunk or all of them – except at an eye-popping valuation has generated a return that seems reminiscent of the late 1990s. ArcSight raised only about $30m to build a business that got valued at 55 times that level on the exit.

A deal in sight for ArchSight?

Brenon Daly

Contact: Brenon Daly

If nothing else, the long Labor Day weekend gave us all a chance to catch our breath following a week of some of the most frenetic dealmaking we’ve seen in some time. We had bidding wars, doubleheader deals and even a billion-dollar chip transaction. But in some ways, the loudest buzz in the tech M&A market came from a deal that didn’t happen: ArcSight still stands on its own.

The ESIM vendor was supposedly in play, at least according to a thinly sourced and almost woefully vague recent article in The Wall Street Journal. Not to pick apart the piece, but listing a half-dozen of the largest tech companies as ‘potential bidders’ misses a great deal of context. For instance, we noted two and a half years ago that Hewlett-Packard was rumored to have offered about $600m for ArcSight the summer before it went public. ArcSight is now worth twice HP’s rumored bid, and roughly four times the amount the market valued it at when it came onto the Nasdaq in February 2008, just before the IPO window pretty much slammed shut. (For the record, Morgan Stanley led the ArcSight offering.)

That stellar aftermarket performance raises another interesting point about ArcSight: despite the fact that its shares have quadrupled during a time when the Nasdaq has essentially flat-lined, the company has never done a secondary offering. It has just 37 million shares outstanding. That strikes us a narrow base for a firm with $200m in sales and a market valuation of more than $1bn. But maybe the company figures it shouldn’t bother selling shares at current market prices if it stands to get a substantial takeout premium on top of that. For our part, we wouldn’t at all be surprised to see ArcSight get a second exit.

Wall Street job pays off for Salary.com

Brenon Daly

Contact: Brenon Daly

Strictly from the view of the corporate treasurer’s office, Salary.com got paid while on Wall Street. The compensation management vendor went public at a valuation that – in rather short order – would never again be available to the company. The outsized chunk of money that it raised in its early 2007 IPO, which came right before the window for new offerings slammed shut, has helped fund its money-burning operations since then.

In its mid-February 2007 IPO, Salary.com sold 5.7 million shares at $10.50 each. Of that amount, 4.9 million came from the company, meaning it raised some $51m. (That relatively fat offering came despite the company only recording $23m in revenue in the year leading up to its IPO.) In the year after the debut, the stock basically traded at or slightly above the offer price. But in early February 2008, it broke issue and would never again change hands in the double digits. Kenexa bid $4.09 for each share of Salary.com.

The fact that Salary.com is getting taken off the Nasdaq at less than half the price that it came on the exchange underscores just how much Wall Street has backed away from risk. And, unfortunately for Salary.com – a tiny company that’s put up only red numbers – that has meant investors backing away from it. To get a sense of just how small Salary.com is, consider this fact: each year, the company generates about $40m in sales, roughly the amount that its acquirer, Kenexa, generates each quarter. And we can’t overlook the fact that its unprofitable operations had burned down its stash of cash to about $8m, compared to more than $20m last year.

So all things considered, the planned sale of Salary.com is not such a bad outcome for the vendor. It gets valued at about 1.6 times trailing sales, roughly matching the multiple in some other recent human capital management (HCM) deals. (For instance, we understand that ADP paid about $110m for Workscape earlier this summer, a transaction that valued the HCM vendor at about 1.8x trailing sales.) In any case, if Salary.com hadn’t gotten a Wall Street windfall in the form of an IPO, we’re fairly certain that the company would have had a much rougher go of it during the Credit Crisis, and probably wouldn’t even have fetched the $80m that it got in its sale to Kenexa, or any other buyer.

A bidding war (of sorts) between the virtualization vendors

Brenon Daly

Contact: Brenon Daly

The tech industry has another bidding war. No, we’re not talking about the parrying over 3PAR or even the private equity shops slugging it out over Phoenix Technologies, a company that had largely been consigned to the corporate ash heap. Instead, we’re talking about the latest M&A moves by the virtuosos of virtualization, Citrix Systems and VMware.

Citrix opened the bidding with one deal earlier this week, putting its chips on virtualization management startup VMLogix. One day later, VMware matched the bid of one acquisition and then raised it another one. In a rare twin billing, VMware said it would be taking home both performance analytics startup Integrien as well as identity and access management vendor TriCipher. VMware’s two deals in a single day (do we call the amalgamated company ‘Trintegrien’?) brings its total number of acquisitions so far this year to five, after just one in all of last year. For its part, Citrix had been out of the market entirely since November 2008 before announcing the VMLogix purchase.

Of the three deals, the one that caught our eye was VMware’s pickup of Integrien. That might have been due to the astronomical multiple the startup garnered. We understand that the company, which was only running at about $2m in revenue, went for about $100m. Of course, looking at this transaction on a revenue multiple largely misses the point. Instead, as my colleague Dennis Callaghan notes in his report on the deal, the move makes VMware a legitimate contender in the IT performance management market and could hurt opportunities for other IT performance management vendors looking to sell into the vast VMware installed base.

The acquisition came just one day after Integrien released a special version of its flagship predictive root cause analysis software for VMware environments, so the two sides clearly knew each other. In fact, we gather that the two sides knew each other so well they negotiated directly, without an outside adviser. The VMware team was led on the Integrien deal by Alex Wang. Meanwhile, on the day’s other transaction, America’s Growth Capital advised TriCipher, while Jason Hurst, who recently joined VMware after a long stint as a software banker at Citigroup, led the buyside effort.

Google picks on the pipeline

Brenon Daly

Contact: Brenon Daly

As if the IPO process wasn’t already hard enough, candidates looking to go public have found a new obstacle: Google. For the second time in less than a year, the search giant has swung its considerable market heft against a would-be public company – likely trimming hundreds of millions of dollars in market cap from the IPO aspirants. That from a company with the informal motto of ‘Don’t be evil.’

Most recently, Google introduced Google Voice, an add-on to its Gmail offering that allows for free calls to anywhere in North America. If that sounds vaguely familiar, it’s because Skype has been in that business for about seven years now. On the back of that product, Skype filed its paperwork with the SEC earlier this month to go public, less than a year after being carved out of eBay. In the first half of 2010, Skype reported $406m in revenue, according to its S-1 filing.

And it isn’t like Google just stumbled on the idea of Google Voice as a ‘Skype killer,’ or however it thinks of the offering. From our vantage point, Google has set a deliberate course of M&A to acquire bits of useful technology and engineers for a VoIP offering. The company reached for Global IP Solutions in May after picking up On2 Technologies last year, a deal that required Google to top its initial bid. So Google clearly wanted to be in this market, and was willing to buy its way into it.

This bit of sharp-elbowed competition comes after Google made an even more drastic entrance last November into the turn-by-turn navigation market. Just two days before TeleNav, one of the largest mobile navigation vendors, put in its IPO paperwork, Google announced that it would be offering turn-by-turn directions. Although the service would be available on only a very limited number of devices, Google’s price was hard to beat. (It was free.) Granted, TeleNav has run into trouble (no pun intended) of a different sort since it listed on the Nasdaq. But the company seemed almost destined for difficulties after being born under a bad moon, thanks to Google.

A hoarse auctioneer for 3PAR?

Brenon Daly

Contact: Brenon Daly

The back-and-forth bidding for 3PAR moved higher again Friday, as the counteroffer to the counteroffer pushed the value of the high-end data storage vendor to $2bn. In the latest move, Hewlett-Packard lobbed a bid of $30 for each share of 3PAR, topping its offer from Thursday of $27 per share that had been matched by Dell. If 3PAR opts for HP’s bid, Dell has three days to come back with an offer of its own, according to terms. Dell, which opened the process 10 days ago with a bid of $18 per share, has already matched two efforts by HP to derail the deal.

As is pretty much always the case when would-be buyers with deep pockets go against each other, the price of the target company moves higher. (It’s fundamental supply-and-demand economics, after all.) Yet in the case of 3PAR, we’re not talking bids that are sweetened with a teaspoon or two of sugar – we’re talking cups of the stuff. (To recap the investment banks that are helping to advise their clients on how much sugar to dole out: Qatalyst Partners is banking 3PAR, while Credit Suisse Securities is banking Dell and JP Morgan Securities is banking HP.)

The latest offer values 3PAR at basically $830m higher than the opening takeout valuation, which was already the highest the storage company had ever seen. (In fact, Wall Street valued 3PAR at less than $800m before all this bidding started. Shares had basically bounced around $10 each for most of the year.) HP’s offer gives 3PAR an equity valuation of $2bn, two-thirds higher than Dell’s initial bid that gave it a $1.25bn equity valuation. For those wondering about the ‘price discipline’ at the two suitors, we would note that the going rate for 3PAR is now 10 times trailing sales.

A clear return and ‘cloudy’ outlook for Tripwire’s only deal

Brenon Daly

Contact: Brenon Daly

Exactly a year ago, Tripwire made its first and only acquisition in its 14-year history, picking up the assets of Activeworx. The tiny startup added log management technology to Tripwire, an IT configuration and compliance vendor. The deal itself, which only set Tripwire back about $3m, was a fittingly quiet purchase of a company that had lived a pretty quiet life. On Thursday, Tripwire took that technology to the cloud.

Although Tripwire actually closed its pickup of Activeworx last August, it only began talking about its log management offering, which is based on the acquisition, earlier this year. It also only began selling its log management offering earlier this year. As it was rolling out the offering, we noted that the log management market looked awfully crowded. But so far, Tripwire appears to be getting a solid return on its Activeworx buy. From a standing start, Tripwire’s Log Center business has generated about $2m of license sales in the first two quarters of 2010. (And to be clear, that’s GAAP revenue, as listed in the company’s latest amendment to its S-1 filed with the SEC, not some loosey-goosey figure that has been rounded way up.)

Granted, the Log Center contribution is still a small slice of the $18m in total licenses it has sold over the same period, and an even smaller portion of the $40m it tallied as total first-half 2010 revenue. But for a new product introduction, that’s a strong start out of the gate. And today, Tripwire announced a partnership with Terremark through which the datacenter provider will now be offering Log Center to its clients. The on-demand compliance and security arrangement between the two companies marks the first cloud offering from Tripwire.

Having its inaugural acquisition already producing revenue at a strong clip, we suspect that Tripwire will look to return to the market. The only question in our mind is what corporate structure Tripwire will have when it goes shopping again. Will it remain a privately held company, or will it see through its IPO filing and join the ranks of the Nasdaq-listed companies? Or will it – as we have speculated in the past – get snapped up by a larger vendor? From what we’re hearing now, however, a Tripwire trade sale is looking less likely than earlier in the summer. From our perspective, two of the companies that would head any list of likely buyers for Tripwire (McAfee and Hewlett-Packard) have their own M&A events to sort through right now.