Category: VC

Done dabbling in VC

Brenon Daly

Contact: Brenon Daly

During the tech recession at the beginning of this decade, many of the venture efforts started by both corporations and investment banks ground to a halt and quietly went away. In the current downturn, it’s the venture efforts from the buyout shops that seem to be vanishing. Over the past year, marquee PE firms The Carlyle Group and 3i have both shuttered their VC investment programs. On Wednesday, Jafco Ventures announced that it had picked up former Carlyle venture capitalists Nick Sturiale and Jeb Miller.

The pair had only recently moved over to Carlyle to help accelerate its planned push into VC. Washington, D.C.-based Carlyle had raised some $1.4bn in three US funds, dating back to 1997. The funds not only invested in early-stage ventures, but also financed expansion-stage growth companies and smaller buyouts. The move comes after UK-based 3i stopped its early-stage investments, and the head of US tech investments, Sandy Miller, joined late-stage venture firm Institutional Venture Partners.

The fact that some ‘merchants of debt’ are done dabbling in venture capital is understandable given the pressing problems in their core business of taking companies private. With the credit market largely closed and the IPO window firmly shut, PE shops have virtually no chance to book any gains. In fact, few – if any – LBO firms are talking about gains in their current portfolio. The general business slump, exacerbated by the heavy debt loads of many of these companies, has already driven a few into bankruptcy. This has been particularly true of the retail companies taken private in the past few years. But the Chapter 11 contagion is likely to spread to other sectors – including technology.

Divesting at any costs

Brenon Daly

Contact: Brenon Daly

We recently noted how VCs are having to settle for scrap sales as they go through a bit of portfolio clean-out. But, hey, at least the value destroyed in each of the companies is only in the tens of millions of dollars. Companies that have been recently cleaning out their own portfolios in the form of divestitures have been eating hundreds of millions of dollars. Even billions of dollars.

Last week, two companies were in the news for what we would consider ‘divest at any cost’ transactions. First up, Motorola unwound its two-year-old purchase of Good Technology. After paying about $500m in November 2006 for Good, we would guess that Motorola almost certainly received less than $50m in selling the mobile messaging infrastructure vendor to privately held Visto. (At least there was something left to sell. The same can’t be said of Intellisync, which Nokia bought three years ago for $354.3m but recently said it will be shuttering.)

More dramatically, Nortel Networks looks likely to pocket just two pennies for every $1,000 that it handed over for Alteon WebSystems in mid-2000. (Keep in mind, however, that Nortel paid the $7.8bn total is stock, not cash.) The bankrupt telecom equipment vendor has put Alteon on the block, and the reported frontrunner is Israel-based Radware, which has put forward a bid of some $14m. (Since Nortel filed for Chapter 11, Alteon is being sold under an auction process run by the bankruptcy court, and other bidders could emerge.) As a final thought on both the Motorola and pending Nortel divestitures, we would note that both castoff divisions are landing in other companies, rather than a buyout shop.

Companies venture lightly into investments

Brenon Daly

Contact: Brenon Daly

A little more than a half-year after striking an initial partnership, Concur Technologies recently led the second round of a $4.6m funding for RideCharge, a startup that allows users to book and pay for taxis over mobile phones. John Torrey, Concur’s head of business development, told us the company, which provides an on-demand employee spending management offering, isn’t interested in being in the content business, so an acquisition wouldn’t have made sense. Concur, which holds some $210m in cash, has done three acquisitions but has been out of the market since mid-2007.

Concur’s investment comes despite a sharp tail-off in corporate VC in the years since the Bubble era. While several tech giants have continued to support their venture wings – including Intel, EMC and SAP, among others – most other companies have wound down their venture operations. And, based on our survey of corporate development officers late last year, they don’t expect to get back into the venture business. Some 36% said they planned to do fewer minority investments in 2009, compared to 22% who expect to do more investments this year.

NetQoS back in the market

Brenon Daly

Contact: Brenon Daly

When we caught up with NetQoS last June, the company had just inked its first purchase after a two-and-a-half-year hiatus, taking home trade-monitoring software startup Helium Systems. The Austin, Texas-based network performance management vendor is now ready to continue that shopping. Speaking at the Pacific Crest Securities Data Center Conference on Wednesday, Gordon Daugherty, the company’s head of corporate development, said NetQos is looking at a broad range of deals in a broad range of sizes.

Daugherty indicated that the company is eyeing companies in markets such as security and systems management, among others. Loosely, NetQoS is targeting a deal that could add about $10m in revenue to the $65m that it plans to record this year. However, Daugherty said the company is open to doing something larger than that placeholder. A larger purchase would require NetQoS to raise money for the first time in more than a half-decade. (The company has been profitable since 2005.) Daugherty added that the majority owner of NetQoS, New York City-based private equity firm Liberty Partners, has signed off on a fresh round to fund the right deal.

NetQoS acquisitions

Date Target Rationale
June 2008 Helium Systems Trade monitoring
December 2005 Pine Mountain Group Services
April 2005 RedPoint Network Systems Device management

Source: The 451 M&A KnowledgeBase

Startup scrap sales

With new funding difficult to come by, many cash-burning startups are finding that they have no choice but to take a scrap sale. Those desperate deals cut M&A spending on VC-backed startups in the second half of 2008 by nearly three-quarters over the same period in 2007. From July to December last year, 100 venture-backed startups got acquired, for a total bill of just $3bn. That compares to 153 startups sold for a total of $11.1bn during the same period in 2007.

And we’ve seen more of these types of deals so far this year. Oracle, SAP, Barracuda Networks and Quest Software, among other large technology buyers, have all purchased companies for less than the money raised by the startups, according to our estimates. Consider the specific case of Mirage Networks. The network access control (NAC) vendor raised some $40m before discovering that NAC wasn’t really a market after all. (The eight-year-old company generated an estimated $5m in sales last year.) Trustwave picked up Mirage for some $10m, we estimate. Meanwhile, Mazu Networks will have to hit all of its earn-outs to make its investors whole again. About a month ago, Riverbed Technology said that it would pay $25m upfront for the network security vendor, with a possible $22m earn-out. That’s actually not a bad outcome for unprofitable Mazu, which we understand was burning about $1m each quarter. And yesterday, Netezza picked up the assets of data-auditing and protection vendor Tizor Systems for $3.1m; Tizor had raised $26m from investors.

VC-backed tech startups M&A

Month 2007 deal volume 2007 deal value 2008 deal volume 2008 deal value
July 23 $2.3bn 21 $994m
August 18 $1.2bn 16 $497m
September 25 $1.7bn 16 $642m
October 39 $2bn 13 $487m
November 27 $3.1bn 20 $346m
December 21 $788m 14 $56m
Total 153 $11.1bn 100 $3bn

Source: The 451 M&A KnowledgeBase

SAP goes (Cog)head hunting

Brenon Daly

Contact: Brenon Daly

Having put a bit of money into Coghead about two years ago through its venture wing, SAP picked up all of the platform-as-a-service vendor in a wind-down sale late last week. Coghead drew in $11m in two rounds from backers El Dorado Ventures, American Capital Strategies and SAP Ventures. American Capital and SAP Ventures joined in Coghead’s last round, raised in April 2007, which came a little more than a year after El Dorado provided a $3.2m first round.

We had heard late last year that Coghead, originally known as Versai Technology, was trying to land another round. However, like so many other startups these days, the company wasn’t having success in raising new capital. Indeed, earlier this month, my colleague Dennis Callaghan noted that Coghead had been quiet for several months. He speculated that the company might fit well into the portfolio of open source business process management vendor Intalio. Coghead actually embedded Intalio’s process engine, and the two startups share SAP Ventures as a backer. (Overall, SAP Ventures has some 38 active investments.)

Instead of landing with Intalio, the Coghead assets are headed to SAP. And what will the German giant do with them? While much of the speculation has portrayed the purchase as SAP buying its way into the cloud, a more tangible indication is the ‘situational applications’ that Coghead announced at last summer’s SAP conference, Sapphire. With Coghead’s technology, users could build and manage applications that integrate with SAP. Given SAP’s proprietary language and platform, allowing customers to build applications or Web front-ends to those applications could go some distance toward getting SAP a return on its investment.

A frozen January

Brenon Daly

Contact: Brenon Daly

In the equity market, there’s a well-known investing phenomenon called ‘the January effect.’ The basis of this is that stocks, particularly small-caps, tend to rise in the first week or two of the New Year as investors buy back some of the names they might have sold for tax reasons at the end of the prior year.

Since the first month of 2009 is in the books, we decided to investigate whether there was a similar January effect on the M&A market this year. Based on the last few years, we’d note that dealmaking tends to start slowly. In each of the past three years, spending on M&A in January has come in significantly below a month-by-month average for the year.

But far more dramatically, the deal totals indicate a new January effect – this year’s market is frozen. Spending plummeted to just $2.1bn in the first month of the year. The reason? The disappearance of the big deal. Autonomy Corp’s $775m all-cash purchase of Interwoven stands as the largest transaction of 2009 so far. However, in January 2008 there were three deals larger than Autonomy-Interwoven, and January 2007 posted six deals larger.

M&A in January

Period Deal volume Deal value % of total annual M&A spending
January 2005 208 $40.5bn 11%
January 2006 321 $16.8bn 4%
January 2007 373 $20.9bn 5%
January 2008 333 $17.6bn 6%
January 2009 204 $2.1bn N/A

Source: The 451 M&A KnowledgeBase

A SaaS-y deal

Brenon Daly

Contact: Brenon Daly

Given the rich premium that Wall Street awards to on-demand software companies, it’s no wonder that vendors still hawking software licenses are looking to get into the business of selling software as a service (Saas). Of course, there are many obstacles in making that transition, ranging from internal (how to compensate sales staff) to external (how to communicate to investors). As a result, most old-line software companies offer only a tiny bit of their products on-demand, if they do at all.

The few vendors that have seriously tried to transition to the on-demand model have used both organic and inorganic approaches. Concur Technologies largely stayed in-house to create a ‘for rent’ version of its expense account software. (Wall Street has rewarded the company with an eye-popping valuation of 5.5x trailing 12-month revenue.) Meanwhile, Ariba more than doubled the on-demand portion of its business when it spent $101m for SaaS supply chain vendor Procuri in September 2007.

We mention all this as a (long-winded) way of saying that we don’t understand why Callidus Software didn’t take home on-demand vendor Centive, which had been on the block for some months. Callidus has been selling its sales compensation management products as a service for about three years, with on-demand shoppers accounting for one-third of its 180 total customers. A year ago, it acquired a small SaaS vendor, Compensation Technologies, for $8.3m to bolster its transition efforts. One source indicated that publicly traded Callidus was initially interested in smaller rival Centive, but didn’t follow through. Instead, last week Centive and its estimated $10m in revenue went to fellow startup Xactly Corp in an all-equity consolidation play. Callidus making a run at Xactly probably won’t happen, for reasons both personal and financial.

For starters, Xactly is too expensive for Callidus, a money-losing company that holds some $39m in cash. An equity deal is probably off the table, given Callidus’ paltry valuation. Its enterprise value is just $46m, less than half the $105m in sales it likely recorded in 2008. (Callidus reports fourth-quarter earnings on Tuesday.) Beyond the money, there’s also the complicating factor that most of Xactly’s executives used to work at Callidus before setting off on their own with an eye to knocking out their former employer with their on-demand model. If indeed the two sides do ever start talking, we might suggest that a family therapist be on hand, in addition to the bankers and lawyers.

Small-time means good time for M&A

-Contact Thomas Rasmussen

Smaller shoppers are increasingly perusing the proverbial deal aisle. As our 2008 Corpdev Outlook Survey conducted in December indicates, 2009 looks to be the year of small-time shoppers. When we delved further into the data to try to get a feel for what corporate development officials from various companies are thinking, we observed an interesting trend: While large firms said they were more likely to do divestures than acquisitions, small companies were significantly more bullish on M&A. (For our purposes, we classified small firms as those with fewer than 250 employees and large firms as those with 2,500 or more employees). In fact, it seems that large acquirers are a bit more wary of the economic realities than their smaller rivals, with some even leaving the market entirely. Corporate development officials at large companies were twice as likely to say the current economic recession is ‘very likely’ to depress deal flow compared to their brethren at small companies.

Anecdotal evidence of this trend reinforces that sentiment. Take Pegasus Imaging Corp, a privately held, employee-owned company founded in 1991 that is recognized for its host of enterprise and consumer-imaging products but mostly for its JPEG-imaging compression technology. After having been out of the market since acquiring its competitor TMSSequoia four years ago, it picked up Tasman Software and AccuSoft’s imaging business last week for an estimated combined cash value of about $30m. The small, privately held shop told us that the current environment is ripe for M&A, and we expect the two acquisitions to be the first of many this year. Meanwhile, serial shopper Avnet may be slowing down, despite having just announced its first deal of the year (last week, the mid-cap company spent an estimated $30m for Nippon Denso Industry, an electronics distributor based in Tokyo). Avnet announced six deals worth $385m in 2008, but recently indicated to us that it will take a much more cautious approach to shopping this year.

Industry makeup of respondents

Industry Percentage
Infrastructure software 32.0%
Applications software 21.3%
Systems/hardware/semi 13.3%
Other 9.3%
Mobile 8.0%
Networking 6.7%
Services 5.3%
Telecommunications 4.0%

Source: The 451 Group Tech Corpdev Outlook Survey, December 2008

Quest shops again, virtually

Brenon Daly

Contact: Simon Robinson, Brenon Daly

A year after closing a deal with Vizioncore that got Quest Software into the storage virtualization market, the company went shopping again this week. The systems management company picked up some of the assets of venture-backed MonoSphere, most notably its Storage Horizon product. This is a storage analysis and reporting tool designed to help storage managers assess the capacity optimization of their existing multivendor arrays so they can reclaim unused capacity and project future requirements more accurately. Storage Horizon will slot into Quest’s portfolio for managing storage in virtualized server environments, which is currently sold under the vOptimizer Pro brand.

As part of Quest, MonoSphere may well have the opportunity to deliver on the promise of its technology. (It was that potential that attracted some $41m in backing from Intel Capital, ComVentures and Lightspeed Venture Partners.) On its own, MonoSphere didn’t have much to show for itself. That’s a familiar story concerning other storage-reporting specialists, which often find that large enterprises are hesitant to buy such tools from small vendors, especially when their existing suppliers are happy to offer similar functionality for little or no cost. But with Quest, which counts more than 100,000 customers and expects to report some $730m in 2008 revenue, MonoSphere may be able to land customers that had previously slipped through its hands.