Category: technology stocks

Juniper returns to the M&A table

Brenon Daly

Contact: Brenon Daly

After almost a half-decade out of the market, Juniper Networks is back buying. The communications equipment vendor announced plans last week to hand over ‘less than $100m’ for Ankeena Networks, its first purchase since picking up Funk Software in November 2005. The company declined to be more specific on the deal value, but at least one source indicated that the price for Ankeena was indeed less than $100m, but not by much.

Whatever its final price, Ankeena undoubtedly got a rich valuation, as it essentially launched a year ago. Sales of the company’s software for serving and managing content delivery were fairly small. Ankeena also undoubtedly delivered a rich return for its three backers: Mayfield Fund, Clearstone Venture Partners and Trinity Ventures. The trio put just $16m into Ankeena.

In the four-and-a-half years that Juniper has been sidelined, its rivals have been busy. Ericsson has inked some 17 deals in that period, including the $2.1bn acquisition of Redback Networks. Meanwhile, Cisco has sealed 39 deals in that time, spending more than $40bn. Most observers would chalk up Juniper’s M&A hiatus, at least in part, to the fact that it came up way short on its biggest gamble, the $4bn all-equity purchase of NetScreen Technologies. (On a smaller scale, Juniper also has precious little to show for its $337m cash-and-stock pickup of Peribit Networks, a WAN traffic optimization vendor that we understand was running at less than $15m in sales.)

Realizing a return on NetScreen was going to be difficult from the outset because Juniper overpaid for the security provider. In a transaction that had more than a few echoes of the Internet Bubble era, Juniper paid 14 times trailing sales and more than 50 times trailing EBITDA for NetScreen. And when it tried to make the deal work, Juniper found itself struggling to integrate NetScreen’s firewall product into its core networking line, and was unable to reconcile NetScreen’s indirect sales model with its own direct model. Maybe buying Ankeena is the clearest sign yet that Juniper, which replaced its longtime CEO in September 2008, has finally closed the NetScreen acquisition and moved on.

HP buys big

Brenon Daly

Contact: Brenon Daly

Earlier this week, Hewlett-Packard closed its $3.1bn acquisition of 3Com. It was a significant shot at the company’s new rival Cisco Systems, adding additional networking and security products to HP’s ProCurve portfolio while also dramatically increasing its business in Asia (3Com generates roughly half its sales in China). The deal was announced on November 11, and closed on Monday.

What’s interesting is that HP, which was once a fairly steady dealmaker, has been out of the market since that purchase. Its rivals, however, haven’t been on the sidelines. In the five months since HP announced the 3Com buy, IBM has inked five deals, Dell has announced two transactions and Cisco has picked up one company. Of course, some of HP’s inactivity could be chalked up to its efforts to digest 3Com, which stands as the company’s fourth-largest acquisition. (On the other side, Cisco knocked out a pair of $3bn purchases in just two weeks in the month before HP reached for 3Com.)

But we understand from a couple of different sources that although HP is looking to do fewer deals, they will be larger. The shift has actually been taking place for some time at the company. In 2007, like a number of cash-rich tech giants, HP was basically knocking out a purchase each month. That pace slowed to just five deals in 2008, including the landmark acquisition of services giant EDS. Last year, HP bought just two other companies besides 3Com. It looks like the company, which is tracking to more than $120bn in sales this year, has realized that the big get bigger by buying big.

A Double-Take takeout?

Brenon Daly

Contact: Brenon Daly

Never mind the business, somebody has their eye on Double-Take Software. The file-replication software vendor said Monday that it came up short in its first-quarter performance, continuing the struggles that it saw throughout 2009. Last year, maintenance revenue flat-lined, while license sales dropped by one-quarter. And although the first quarter is starting off a bit underwhelming, Double-Take is still projecting that it will grow this year. However, even if the company hits the high end of its estimate of $95m, sales for 2010 will still fall just short of 2008’s level of $96m.

Apparently, that lackluster performance hasn’t dimmed the company’s appeal. As Double-Take was announcing its Q1 miss, it also said – in an ‘Oh, by the way…’ manner – that it had received an ‘unsolicited, non-binding’ expression of interest from an unnamed suitor. No terms were revealed so it’s hard to know, specifically, what’s on offer to Double-Take shareholders. The company says only that the bid is ‘above recent trading prices.’ Does ‘recent’ mean a bit under $9, where shares have been since early February? Or does ‘recent’ also include the period in January when shares changed hands above $10, before the company warned (for the first time) that the quarter was coming in a bit light? On the report, Double-Take stock jumped 15% to $10.05 in Monday afternoon trading.

As to who might have floated the bid, it strikes us that this looks like a private equity (PE) play. If a strategic buyer wanted Double-Take, we don’t see it approaching the company in such a fast-and-loose way. Besides, there are basically only two companies that would make obvious bidders: Dell and Hewlett-Packard. The two tech giants are Double-Take’s main channel partners, with Dell accounting for a full 17% of the company’s revenue on its own. Also, both vendors could presumably benefit from Double-Take’s large customer base of SMBs, which numbers more than 22,000. Of course, an auction could draw out any interested strategic player, so the potential bidders aren’t necessarily limited to HP and Dell.

But as we say, we think this offer came from a buyout shop. And we can certainly understand Double-Take’s attractiveness to a financial buyer. In short, it’s cheap. Even with the stock’s pop on Monday, the company still only garners a market cap of about $220m. And the net cost is even cheaper, because the debt-free, profitable vendor carries almost $100m in cash on its balance sheet. At an enterprise value of just $120m, Double-Take is valued at less than three times its maintenance stream. That’s a valuation that any number of PE firms probably figure they could make money on.

Phoenix sheds FailSafe

Brenon Daly

Contact: John Abbott

Phoenix Technologies announced at the start of the year that it was putting its plans to expand beyond the core BIOS software business on hold, and hired GrowthPoint Technology Partners to find a buyer for its non-strategic technology assets. A short time later, CEO Woodson Hobbs was out the door, followed soon after by CFO Richard Arnold. Ironically, Hobbs was originally hired in September 2006 to turn the company around, and his first task back then was to rebuild the BIOS business after Phoenix had lost its way through diversification. It appears that Hobbs fell into the same trap by putting too much effort into HyperSpace, a hypervisor that was being positioned as the basis for an OS for netbooks. Tom Lacey, who previously worked at Applied Materials Inc and before that Flextronics, took over as CEO in February.

Now a buyer has been announced for the first of Phoenix’s unwanted assets: FailSafe, a theft-loss protection and prevention system for laptops, and the associated Freeze computer locking system. The acquirer is security tools provider Absolute Software and the price tag is $6.9m. (This is Absolute’s second acquisition in five months: last December it spent $9.6m on the assets of Pole Position Software, primarily for the target’s LANrev asset management package). Phoenix is still trying to offload HyperSpace itself as well as the eSupport.com line of online PC diagnostics tools.

Since the need for a new OS to run on netbooks now appears to be fading away, HyperSpace could conceivably be utilized by vendors addressing the desktop virtualization market. However, the largest players here – VMware, Citrix and Microsoft – are working with their own hypervisors and are unlikely to want another. Interestingly, Phoenix has filed a patent-infringement lawsuit against startup DeviceVM, the developer of the SplashTop lightweight Linux OS. DeviceVM has licensing deals in place with netbook and laptop makers Asus, Hewlett-Packard, Lenovo, LG Electronics, Acer and Sony.

New CEO Lacey claims that excellent progress is being made on refocusing Phoenix back onto its BIOS business. At the end of fiscal 2009 (ending September 30), the noncore products made up less than 10% of Phoenix’s $67.7m in revenue, an overall decline of 8% over 2008. That means core BIOS sales are back down to the same level as they were in fiscal 2006, despite the acquisition of direct rival General Software Inc in July 2008. In its most recent first quarter, the company posted revenue of $15.6m (down from $17.4m in Q1 2009) and a profit of $1.1m (including a one-off $7.1m income tax refund). Phoenix has cash on hand of $27.9m.

Is QlikTech a billion-dollar baby?

Brenon Daly

Contact: Brenon Daly

IPOs are not what they used to be. The companies looking to go public recently have had to scale back their expectations, cutting both the amount of money they hope to raise and what they expect to be worth as they start life as a public company. The implications of these slimmed-down debuts extend far beyond the IPO candidates themselves. Smaller offerings trim the fees available for underwriters, which rely on these hotly contested mandates to offset the cost of supporting research and trading for public companies. And perhaps more alarmingly, the lower IPO valuations make it difficult for venture capitalists and other investors to realize decent returns in what was once a fairly sure path to outsized performance.

At least that’s the situation for most IPO candidates. (For instance, we’re not knocking either Meru Networks, which went public last week, or Nexsan, which is slated to come out this week, but both are valued by the market at less than $300m.) However, there are exceptions. Just as a few companies were able to make it public in 2009, while most would-be debutants just had to ride out the recession as private businesses, there will be rich valuations doled out to IPO candidates, even during this time of discounts.

From our perspective, the next player that’s likely to enjoy a warm welcome on Wall Street is QlikTech. (At $100m, the offering itself is one of the largest enterprise software IPOs in some time.) In fact, if we pencil out the initial valuation for this fast-growing, profitable analytics provider, we come up with a number that’s in the neighborhood of $1bn. QlikTech may not hit that magical mark on its debut, but we suspect that it won’t fall too far below it. Look for our full report on the company and the offering, including our projected financials and valuation for QlikTech, in tonight’s Daily 451 sendout.

Nexsan: Next to go out

Brenon Daly

Contact: Brenon Daly

Nearly two years after it first filed its IPO paperwork, storage vendor Nexsan appears set to hit the Nasdaq later this week. The company is planning to sell 4.8 million shares at $10-12 each. At the high end of the range, the offering would raise some $59m for Nexsan, which would start life as a public company with an initial valuation of about $200m. Thomas Weisel Partners is running the books for Nexsan, which will trade under the ticker NXSN.

The offering continues the trend of smaller IPOs and lower initial valuations that we recently noted. Back in April 2008, Nexsan planned to raise $81m in its offering. However, the actual proceeds will come in about one-quarter below its original expectation. Similarly, the valuation that we penciled out for Nexsan two years ago has proved a bit too rich.

Back in our initial report on the company, we figured that Nexsan would hit the market at a valuation of around $300m. Built into that projection, however, was the assumption that the storage vendor would be able to increase revenue at about a 20% clip. (That didn’t seem unreasonable back in 2008, considering Compellent Technologies – a similar storage startup that had recently gone public – increased revenue 78% that year.)

Instead, Nexsan actually shrank. In its fiscal year that ended June 30, 2009 – a period that basically covers the recent ‘Great Recession’ – overall sales slipped to $61m from $63m in the previous fiscal year. In the two quarters since then, Nexsan has started to grow again, although at a rather muted 6% pace. On the other hand, Nexsan did manage to move into profitability during the worst economic conditions that most US businesses have seen.

An exclusive ‘club’

Brenon Daly

Contact: Brenon Daly

The price of admission for a ‘club deal’ just got a bit more expensive. The trio of private equity (PE) firms bidding for Irish e-learning firm SkillSoft recently bumped their offer to $1.2bn, up from the original $1.1bn bid in mid-February. The buyout firms teaming up to take SkillSoft private are Berkshire Partners, Bain Capital and Advent International. According to terms, the trio will be using equity to cover slightly more than half of the purchase price ($680m, or 57% of the $1.2bn transaction).

The planned leveraged buyout (LBO) of SkillSoft is one of only three take-privates by a PE club since January 1, 2008 valued at more than $1bn. (That doesn’t include syndicate purchases of divestitures or other parts of companies, such as the carve-out of Skype from eBay by a quartet of firms.) When credit was flowing freely in 2006-07, multibillion-dollar LBOs were plentiful, which was a primary reason that overall spending on tech M&A in each of those years topped $400bn. In both 2006 and 2007, PE shops accounted for more than 20% of all money spent on tech deals.

The topping bid for SkillSoft comes at a time when overall PE spending is dropping to some of the lowest levels since it began to recover last year. After averaging about $9bn in both of the quarters since the US recession officially ended, the value of deals by PE firms fell to just $6bn in the recently completed first quarter. Incidentally, the decline of PE deal value matched almost exactly the drop-off in overall first-quarter tech M&A spending, which came in at the low end of the range that we’ve tallied in recent quarters. Click here to see our full report on first-quarter M&A.

PE activity

Period Deal volume Deal value
Q1 2010 63 $6bn
Q4 2009 92 $9.9bn
Q3 2009 83 $8bn
Q2 2009 76 $2.8bn
Q1 2009 46 $250m

Source: The 451 M&A KnowledgeBase

Consistently inconsistent M&A in Q1

Brenon Daly

Contact: Brenon Daly

The first quarter is in the books and it’s hard to read much from it, at least in terms of M&A. While the quarter saw more deals announced than any other quarter since the credit crisis erupted, the aggregate spending on those transactions is lingering about one-third below the recent average. In the just-completed quarter, we recorded 841 acquisitions, with a total bill of $31bn. (We should note that nearly one-third of the M&A spending in the quarter came on a single telecom deal, where an Asian operator spent $9bn on mobile businesses in Africa just two days before the end of the quarter.)

Overall, the numbers point to an inconsistent recovery in the M&A market. On the one hand, many of the big buyers were busier than ever. CA Inc, Google, IBM and Oracle (among others) all announced at least three transactions in the just-completed quarter. But on the other side, we also saw a number of deals that continued the worrisome trends that we thought we might have left behind in 2009, with additional scrap sales and low-multiple divestitures in the first few months of 2010. Look for our full report on first-quarter M&A in tonight’s MIS and TDM sendouts.

Recent quarterly M&A activity

Period Deal volume Deal value
Q1 2010 841 $31bn
Q4 2009 822 $55bn
Q3 2009 758 $38bn
Q2 2009 778 $49bn
Q1 2009 663 $10bn

Source: The 451 M&A KnowledgeBase

‘Pay us to shut up’

Brenon Daly

Contact: Brenon Daly

Add another deal to the hit list for plaintiffs lawyers. The ink was barely dry on Thoma Bravo’s $143m all-cash offer for PLATO Learning late last week before the ambulance-chasing law firms launched their ‘investigations’ into whether the online education company did right by its shareholders. Equally wrongheaded lawsuits (at least in our view) have been filed against Chordiant Software and Techwell in recent days.

Never mind that the bid of $5.60 for each share of PLATO represents the highest price for the stock since November 2006. And never mind that with the premium, shareholders in PLATO have seen the value of their holdings more than triple over the past year. (That’s five times the return booked by those of us who had our money in the S&P 500 over the past year.)

According to PLATO, it wasn’t looking to sell itself when the buyout shop approached it a few months ago. (Terms do include a no-shop provision, but there is a ‘fiduciary out’ that would allow the company to talk with other suitors, if any surface. There is a $5.8m breakup fee, representing a slightly higher-than-average 4% of deal value.) Of course, none of the terms really matter in the strike suits. The law firms are just looking to make noise, hoping the companies will pay them to shut up.

IronPlanet: heavy metal and high margins

Brenon Daly

Contact: Brenon Daly

We recently noted that for the IPO market, thin is in. The offering sizes for many of the would-be debutants have been trimmed, as have the initial valuations. But in one area, some of the companies that are looking to come to market are still very, very bloated: funding. Force10 Networks, which put in its IPO paperwork earlier this month, had hit up investors for more than $400m. Motricity, which filed back in January, also raised at least that much.

So it was refreshing to skim the recently filed prospectus from IronPlanet, an online marketplace for industrial machines. Certainly, brokering the sales of tractors and bulldozers isn’t the sexiest business. But there’s good money to be made, at least based on IronPlanet’s recent performance. The capital-efficient company has been profitable for the past four years. (And that’s GAAP profitability, not the ‘kinda, sorta’ profitability that most private companies talk about.) Although it has raised some $47m in venture backing, IronPlanet currently has $30m of cash and equivalents on its balance sheet – a number that’s growing.

The 10-year-old company has increased revenue more than 50% in each of the past two years, finishing 2009 with $54.7m in sales. (It sold nearly a half-billion dollars worth of heavy machinery on its network last year.) And IronPlanet isn’t just running its business for cash. It spends heavily on sales and marketing (44% of revenue in 2009) to increase its profile and has put some money behind its recent push to expand geographically.

Two years ago, IronPlanet started investing in business outside of North America. The international unit, which generates roughly 10% of total sales, currently burns cash, while the legacy North America unit hums along at about 20% EBITDA margins. (Overall gross margins stand at an enviable 78%.) In looking ahead to forecast Wall Street’s reception for this online marketplace, we might point out that eBay shares have tacked on 110% over the past year, twice the gain of the Nasdaq during the same period.