Category: unsolicited deals

ACI looks to crash S1’s wedding

Brenon Daly

Contact: Brenon Daly

Just a month after announcing its largest-ever acquisition, S1 Corp has found itself unexpectedly (and perhaps unwelcomely) on the other end of a potential transaction. The payments software maker agreed in late June to acquire Fundtech in a stock swap valued at $326m. On Tuesday, ACI Worldwide sought to play the spoiler in that planned marriage, pitching an unsolicited offer to S1 that it says holds ‘significant upside’ compared to the proposed Fundtech deal.

ACI is offering $9.50 in cash and stock for each share of S1, for total consideration of $540m. The bear hug represents a premium of 33% over S1’s previous closing price and the highest price for the stock since late 2004. ACI says it has the financing lined up and could close the deal by the end of the year. Although S1 hasn’t responded to ACI’s proposal, its stock traded in line with the offer, changing hands on Tuesday afternoon at about $9.35.

In some ways, the current interest in S1 is about a half-decade overdue. We speculated in September 2006 that the company was likely on its way out. At that time, S1 was busy unwinding some misguided deals that it had inked years earlier as part of a larger ‘strategic review.’ (The divestitures came at a time when activist hedge fund Ramius Capital was the company’s largest shareholder.) Had it made its move then, ACI could have picked up the company on the cheap: S1 was trading at half the level of ACI’s current bid.

Apax goes double or nothing in big software bet

Brenon Daly

Contact: Brenon Daly

Apax Partners is going double or nothing in the latest addition to its software portfolio. The buyout firm plans to spend a total of $2bn to put together a pair of old-line ERP vendors, Epicor Software and Activant Solutions. And it is very much a ‘paired’ deal. In fact, according to terms, Apax closing its Activant purchase is a precondition of its planned take-private of Epicor.

That said, neither Apax’s purchase of Activant from its current private equity (PE) owners nor the buyout of Epicor should present much of a problem to get closed this quarter. But it does underline the necessity of cost ‘synergies’ in a deal (or in this case, two) for a mature company. (We noted that fact in the very similar proposed take-private of Lawson Software.)

If the double-barreled deals go through (as we assume they will), it would mark the end of a two-and-a-half-year effort by Elliott Associates to get Epicor sold. The hedge fund accumulated a 10% stake in Epicor in 2008 and then floated an offer of $9.50 for each remaining share of Epicor. It later trimmed that to $7.50 per share as the software company’s outlook deteriorated. (Epicor’s total revenue dropped 16% in 2009, and sales in 2011, while expected to increase, are still forecasted to come in below the level of 2008.) Apax is set to pay $12.50 per share for Epicor – an offer that Elliot has signed off on.

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.

Looking at Lawson

Brenon Daly1 Comment

Contact: Brenon Daly

What was shaping up as an explosive showdown between Carl Icahn and Genzyme has been defused ahead of today’s board meeting at the biotech company. By adding two nominees selected by Icahn to the expanded board of directors, Genzyme avoided the full-blown proxy fight that had been brewing. With that matter settled, we wonder if Icahn will turn his attention to his newest tech investment – Lawson Software.

The gadfly investor owns stock and options equaling about 15.6 million Lawson shares, or roughly 9.7% of the old-line ERP vendor. As is often the case in his investments, Icahn says he will push for moves that maximize shareholder value, which could include a sale of the company. However, we would note that in his recent role as shareholder activist, Icahn hasn’t succeeded in putting his holdings in play.

Although he helped spur the sale of BEA Systems in early 2008, his more recent agitation hasn’t necessarily resulted in M&A. Among other holdings, Icahn has owned or currently owns stakes in Yahoo, Motorola and Mentor Graphics – all of which still trade on their own. Likewise, we suspect Lawson will remain independent, even if Icahn pushes for a sale.

For starters, the company isn’t cheap. Shares have tacked on 60% over the past year – twice the return of the Nasdaq and three times the gain of Oracle over the same period. That gives Lawson a market capitalization of $1.3bn. (It holds roughly the same amount of cash and debt, so Lawson’s enterprise value is also about $1.3bn.)

If we assume the company will generate about $350m in maintenance revenue in its current fiscal year, Lawson currently trades at 3.7 times its maintenance revenue. A conservative 30% premium on top of Lawson’s current valuation would add $400m to the price, for a total cost of $1.7bn or nearly 5 times maintenance revenue. That valuation isn’t overly rich, but it is probably at the high end of the range that a financial-minded buyer could make work.

Emulex goes from defense to offense

Brenon Daly

Contact: Brenon Daly

This time a year ago, Emulex was stiff-arming an unwelcome suitor. Now, it is warmly embracing another company. Emulex said Monday that it will acquire ServerEngines for $159m in cash and stock.

It will hand over about $78m in cash and eight million shares, which were valued at $81m based on Emulex’s closing price ahead of the announcement. The deal, which is expected to close in July, also has a possible earnout of four million shares that would be paid over the next two years. (While the terms are fairly straightforward, it does have one surprising agreement: a $10m breakup fee, representing a fairly steep 6% of the deal value.)

Emulex’s purchase of its partner comes a year after the vendor fended off an unsolicited bid from larger rival Broadcom. The fight between the two Southern California companies turned particularly nasty during the two-and-half-month process, which ended last July after Emulex’s board shot down Broadcom’s offer for a second time. (For the record, shares of Emulex trade at roughly the level of Broadcom’s first offer but 14% below its topping bid.) The two companies are still battling it out in the courtroom over alleged patent infringement.

As a final thought, we would note that Emulex’s contentious relationship with Broadcom is probably not an unknown feeling at the firm that it just acquired, ServerEngines. A decade ago, the CEO of SeverEngines, Raju Vegesna, sold his previous company ServerWorks to Broadcom for $1.8bn. He left two years later after a fallout with Broadcom leadership over the strategic direction of the business.

Sources: a take-private for Double-Take

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Contact: Brenon Daly

The final bidders for Double-Take Software have narrowed to three buyout shops, and a purchase of the file-replication software vendor could be announced within the next two weeks, we have learned. The company said a month ago that an undisclosed bidder had approached it about a possible transaction.

A number of sources have pointed to Vector Capital as the unidentified suitor, adding that the firm is one of the three bidders still in the running. Although we speculated early on that Double-Take’s two main channel partners (Dell and Hewlett-Packard) might be interested, we understand now that there aren’t any strategic bidders currently at the table.

The price couldn’t immediately be learned, but we suspect there won’t be a huge premium for the company, which was trading at $9.36 on Monday afternoon. The reason? Double-Take recently trimmed its sales outlook for 2010, essentially saying it doesn’t expect to grow this year. It recently guided to about $86m in sales for 2010, about 10% lower than it had expected earlier this year. It finished the recession-wracked 2009 with revenue of $83m, down from $96m in 2008.

Even without growth, Double-Take undoubtedly holds some appeal to a private equity (PE) firm. For starters, the company is cheap. It currently sports a market capitalization of just $200m, but nearly half that amount is made of its cash and short-term investments. (The company held $89m in its treasury at the end of the first quarter.)

With an enterprise value of only $111m, Double-Take now garners just 1.3x projected sales. Another way to look at it: even with a decent premium to the company’s current valuation, a buyer could still pick up Double-Take for about 4x maintenance revenue. Small wonder that a few PE shops are still considering a Double-Take takeout.

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.

A nope from Novell

Brenon Daly

Contact: Brenon Daly

The only surprise about Novell turning down the unsolicited $2bn offer from Elliott Associates was the timing. In an unorthodox move, the software vendor said ‘thanks, but no thanks’ to the hedge fund on Saturday morning, when most thoughts were turning to a full day of March Madness. (And what a maddening day it turned out to be, at least for people who filled out their brackets with top seeds: On Saturday, teams seeded No. 1, No. 2 and No. 3 all got sent packing.)

In dismissing the bid, Novell’s board of directors said the offer from Elliott of $5.75 for each share ‘undervalues’ the company and its growth prospects. As an aside, we’re not exactly sure what growth Novell is referring to. The vendor has come up short of Wall Street revenue estimates for both quarters of its current fiscal year so far, and sales this fiscal year, which ends in October, will almost certainly come in below the $862m it recorded last fiscal year. Revenue in the following fiscal year is also likely to come in below last fiscal year, at least according to Wall Street projections.

Even without much top-line excitement, Novell does nonetheless have some valuable assets: A bankable $600m maintenance revenue stream, a decent Linux business and probably the fourth-largest portfolio of identity and access management technology. Of course, its most attractive property is its treasury, which is stuffed with a cool $1bn in cash and short-term investments.

And finally, we would note that Novell does have an experienced adviser in JP Morgan Securities as it explores options to enhance shareholder value. In just the past 10 months, JP Morgan has worked with two other long-in-the-tooth software companies that have been targeted in publicly contested M&A processes. Both Borland Software and MSC Software ended up getting sold, with Borland going for a whopping 50% higher than the initial bid.

Chordiant hits the bid

Brenon Daly

Contact: Brenon Daly

When Chordiant Software received an unsolicited offer from CDC Software in early January, we were pretty certain that deal had roughly 0% chance of getting done. We noted that Chordiant had a poison pill in place that would make it extremely difficult – and time-consuming – for CDC to finalize the deal. Since a quick close was one of the key concerns for CDC in its bid for Chordiant, we weren’t at all surprised to see the serial buyer pull its cash-and-stock offer just a week after floating it.

In addition to the timing, there was also the consideration that Chordiant shares traded above CDC’s offer the entire time it was out there. (In this case, investors agreed with Chordiant’s contention that the bid ‘undervalued’ the company.) That meant CDC would most likely have to reach a little deeper into its pocket to get the deal done. Although CDC indicated that it may well bump its bid, most observers expected the company to walk. (That’s just how the process played out three years ago, when CDC launched an unsolicited offer for another CRM vendor, Onyx Software, only to come away empty-handed.)

Flip the calendar ahead two months, and Chordiant (advised by Morgan Stanley) has pulled off a pretty rare trick: stiff-arming that unwelcome bid and then securing a richer payday for shareholders. (Most cases tend to look more like Yahoo, which is trading at half the level that Microsoft offered for the company two years ago. Yahoo shares have lost 20% of their value since Microsoft floated its bid, while the Nasdaq has flat-lined in that period.) And Chordiant didn’t just hold out for a nickel or a dime more for its shareholders. It got the highest price for its shares in a year and a half.

Under terms announced Monday, Pegasystems will pay $5 in cash for each share of Chordiant, for a total equity value of $161.5m. That’s 54% more than CDC thought the company was worth, and enough to get Chordiant’s board to (wisely) hit the bid from Pegasystems. Speaking of Chordiant’s board, we would note that chairman Steven Springsteel, who also serves as CEO, is now four for four in terms of helping to sell the companies where he held executive roles. As we noted three and a half years ago, when we first opined that Chordiant probably wasn’t a stand-alone vendor, Springsteel had seen a trio of his previous companies get gobbled up.

Bids for Chordiant

Date Suitor Offer Equity value EV/TTM sales multiple Status
January 8, 2010 CDC Software $3.46 per share $105m 0.7x Aborted
March 15, 2010 Pegasystems $5 per share $161.5 1.4x Closing in Q2

Source: The 451 M&A KnowledgeBase

Cadbury gets sweet deal; Yahoo sours

Brenon Daly

Contact: Brenon Daly

When Kraft Foods first launched its bid for Cadbury four months ago, we termed the offer ‘an Old Economy rendition’ of Microsoft’s reach for Yahoo in early 2008. And while it wasn’t a direct parallel, there were a number of similarities: A diversified, dividend-paying company makes an unsolicited play for a target that’s only just into a restructuring program, with a goal of bolstering a business where it’s currently an also-ran.

The parallels diverged even wider on Tuesday, as the British confectioner agreed to a raised bid from Kraft. Cadbury shareholders will pocket $19.5bn in cash and Kraft stock for their company, about 11% higher than Kraft initially offered. It represents the highest-ever price for Cadbury stock on the London Stock Exchange.

So that’s the reward to shareholders from a selling company. What about on the other side? What’s happened to the owners of Yahoo since the Internet giant spurned the advances of Microsoft (as Cadbury once dismissed the interest of Kraft)? Shares of Yahoo currently trade at just half the level that Microsoft bid for them. And it isn’t just the fact that shares got hit by the biggest economic upheaval since the Great Depression since Yahoo turned down Microsoft’s interest. In the nearly two years since that decision, the Nasdaq has basically flat-lined while Yahoo stock has dropped by one-third.