Contact: Simon Robinson
The storage M&A market is expected to favor smaller private providers this year, as recent activity has reduced the number of available midsize public targets. Indeed, in the past 24 months, Data Domain, 3PAR, Isilon Systems and Compellent have all been taken off the market. And buyout speculation caused by this recent spate of activity has bloated valuations at remaining public firms, such as CommVault, making them less likely to be acquired next.
But while recent public storage acquisitions may have halted the sales of their public peers, they may have actually benefited private suppliers. For example, EMC’s reach for Isilon highlighted the growing requirement for high-scale storage systems in markets where the exponential growth of highly rich – or ‘big’ – data is a key pressing challenge. Indeed, that deal could be important in refocusing attention on the remaining privately held players.
We took a look at several of the remaining private targets in a recent Sector IQ and noticed that would-be buyers still have several options to choose from. Though the IPO window has been closed for a couple of years, there are many attractive storage specialists that are fairly mature on both the product and go-to-market fronts, and a closer examination reveals a number of storage system specialists that were formed in the late 1990s that are still making headway today. Click here for our full report on potential targets in the storage sector.
Contact: Brenon Daly
The number of big-ticket deals in 2010 jumped by one-quarter from the level posted in each of the past two years, an indication that buyers are once again open to a bit more risk. We tallied 40 transactions valued at $1bn or more last year, up from 32 in 2009 and 33 in 2008. One of the reasons for the rise in 2010 – unlike the two previous years – is that the acquirers had to top a pretty bullish tech market to secure their deals. Companies including Isilon Systems, Netezza, ArcSight and 3PAR all got taken off the board last year at their highest-ever valuation.
Also unlike the two previous years, we had a number of ‘serial shoppers’ on the list. Hewlett-Packard inked three 10-digit deals in 2010, while IBM and Intel each closed two of the big transactions as well. And it wasn’t just strategic buyers. The Carlyle Group announced a pair of billion-dollar acquisitions – on back-to-back days, no less. Overall, buyout shops accounted for seven deals last year valued at more than $1bn, up from four in 2008 and five in 2009.
|Number of deals worth $1bn+
Source: The 451 M&A KnowledgeBase
Contact: Brenon Daly
In what would be the third significant acquisition of a publicly traded storage vendor in the past four months, Dell said Thursday that it would offer $27.50 in cash for each share of Compellent (see our full report). The storage company reported 32.8 million shares (on a diluted basis) in its latest quarterly filing, giving the proposed transaction an equity value of $902m. (The final share count would likely be higher due to options vesting and so on.) But if we assume an equity value of $900m, the enterprise value of the deal would come in at roughly $840m. That’s 5.4 times Compellent’s sales of $155m in 2010 and 4.3x its projected 2011 sales of $195m. We would note that valuation is less than half the level commanded in the recent takeouts of both 3PAR (a bidding war pushed the level to 11.2x trailing sales) and Isilon Systems (12.8x trailing sales).
Of course, valuation is very much the issue in this ‘take-under.’ Dell’s bid of $27.50 compares to Compellent’s previous closing price of $33.65. Clearly, much of that advance came as a result of acquisition speculation, as Wall Street watched other storage vendors of roughly the same vintage get taken off the market. On its own, Compellent started the year trading at roughly $23, dropped to about $12 after whiffing its first quarter, and only got back above $20 in late October. Shares closed Thursday at $29.04 (on volume that was seven times heavier than average), indicating that investors aren’t necessarily willing to sell their shares to Dell at a lower price than they can get from one another.
Contact: Brenon Daly
EMC’s planned purchase of Isilon Systems comes as the second storage acquisition valued at more than $2bn in just three months. In fact, it lines up rather closely on a number of fronts with the other recent big-ticket storage deal, Hewlett-Packard’s pickup of 3PAR. For starters, the adviser. Qatalyst Partners got sole print for helping to sell 3PAR, and also had a hand in the process for Isilon. (Morgan Stanley and Qatalyst teamed up on the sell side.)
In terms of financial results, both Isilon and 3PAR are very similar. The two vendors were both generating about $200m in trailing revenue and only modest amounts of cash flow at the time of their acquisitions. (Both also had slightly more than $100m in cash on hand, thanks primarily to their recent IPOs.) That means both Isilon and 3PAR secured a valuation of more than 10 times trailing revenue in their sales to EMC and HP, respectively. If anything, Isilon is garnering an even richer valuation at 12.8x trailing 12-month sales and 8.7x projected 2011 sales.
And finally, both Isilon and 3PAR are being taken off the market at their highest-ever valuations, with acquisition offers of about $33 for each share. (That was the exact clearing bid for 3PAR, which came after two rounds of bumped bids, while Isilon shareholders are set to pocket $33.85 for each of their shares.) Given that Isilon and 3PAR were trading in the single digits just a few months before their acquisitions, shareholders in both storage vendors have reason to smile.
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.
Contact: Ben Kolada
Just a month after Greenplum was swallowed by EMC for an estimated $400m, fellow data-warehousing startup Kickfire was sold for probably one one-hundreth of that amount to Teradata. Why did the two data-warehousing vendors – both venture-backed, Silicon Valley startups targeting the same market – see divergent outcomes? The answer to that multimillion-dollar question lies in each company’s targeted markets.
The scrap sale of Kickfire was the end result of a misguided approach by the Santa Clara, California-based startup to the low end of the data-warehousing market. Basically, Kickfire was trying to sell appliances through an expensive direct-sale model. However, the economics of a high-cost business model for a low-cost product only work on big sales. Kickfire never got anywhere close to that, collecting only about a dozen customers in its four years of business. (We would contrast Kickfire’s business model with that of its closest competitor, Infobright. That company, which sells a software-only product through an indirect channel, has more than doubled the number of customers over the past year to 120.)
As Kickfire was struggling to sell to small businesses, 30 miles up the road in San Mateo, California, Greenplum was ripening nicely by selling to enterprises. The company’s high-revenue customer accounts helped it quickly grow total sales to just shy of $30m at the time of its sale to EMC. (That works out to an eye-popping valuation of 14 times trailing sales – a multiple that’s twice as high as any valuation the data-warehousing sector has seen in major acquisitions.) Part of the reason it garnered such a high price is that Greenplum counted some 140 customers at the time of its sale.
Other data-warehousing vendors have also experienced the highs of the enterprise market. Netezza and Teradata both made it to the public markets. (Although we heard a rumor that Netezza was almost erased from the market. Word is that EMC first talked to Netezza, even floating a bid earlier this year that basically would have valued Netezza at its current price on the NYSE. Needless to say, talks didn’t go too far between the two Boston-area companies.) And of course, DATAllegro was scooped up by Microsoft for an estimated 7x trailing sales.
With all of this consolidation playing out, we expect that much of the attention in the data-warehousing space is now turning to Aster Data Systems. The fast-growing vendor, which is based in San Carlos, California, has raised $27m in venture backing. If Aster Data gets snapped up in a trade sale (like many of its rivals have), we wouldn’t be surprised to see Dell as the buyer. The two companies are currently partners, and Dell has shown an increasing interest in big data following its continued attempts to buy 3PAR.
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.
Contact: Brenon Daly
Let’s see, where have we heard this before? A storage company with hundreds of millions of dollars in revenue finds itself in a billion-dollar bidding war between two tech giants, advised in the process by high-end boutique Qatalyst Partners. Last summer, scarcity value drove the price of Data Domain; today it’s 3PAR.
Looking to trump Dell’s existing agreement for 3PAR, Hewlett-Packard on Monday lobbed a topping bid for the high-end storage provider. HP, advised by JP Morgan Securities, is offering $24 for each share of 3PAR, giving the proposed transaction an enterprise value of $1.56bn. (That’s according to our math, compared to the $1.66bn that HP gives its bid.) In any case, the offer is some $380m, or 33%, richer than Dell’s initial bid. Recall that Dell’s offer of $18 valued 3PAR at the highest level ever for the stock.
One interesting observation about HP’s topping bid: it is exactly the same percentage (33%) that EMC had to hand over for Data Domain, which had agreed to sale to NetApp. Of course, this is HP’s first counter, while EMC had to bump its own bid. (Initially it offered $30 for each Data Domain share, but ultimately paid $33 per share when it closed the deal in July 2009.) Of course, there was little hope of NetApp matching EMC in a bidding war for Data Domain. In the case of 3PAR, however, rivals Dell and HP are on much closer financial footing. Terms of Dell’s original agreement with 3PAR call for a $53.5m breakup fee
Contact: Brenon Daly
From an investment banking perspective, both EqualLogic and 3PAR started out and finished their lives in much the same way. The two storage vendors filed to go public within a week of one another back in August 2007, and – pending the close of 3PAR’s sale – both will end up inside Dell. Yet while the final destination is the same, the two vendors’ not-so-parallel tracks to Round Rock, Texas, underscore the fact that the tech M&A market, as well as the capital markets, still have a long way to go to recover from the Credit Crisis.
Consider this: In the sale announced Monday, 3PAR garnered just half the multiple that fellow storage vendor EqualLogic got in its sale to the same buyer, at least based on one key metric. 3PAR sold for 5.6 times trailing sales, while EqualLogic went for 12x trailing sales. We would chalk up the eye-popping premium for EqualLogic mostly to the fact that Dell had to effectively outbid the public market to prevent the company from going public. More to the point, Dell had to outbid a bull market, as the Nasdaq had tacked on 20% in the year leading up to its purchase of EqualLogic in November 2007.
As any company – including 3PAR and Dell – can attest, the bull market ended abruptly and painfully just days after the EqualLogic trade sale. So now we’re left with a market where Dell can offer the highest-ever price for 3PAR shares (representing a staggering 87% premium) and still get a ‘half-off discount’ on valuation compared to its earlier billion-dollar storage deal. But then Dell knows all about discounts over that time period. The company’s market cap has been cut in half (to $25bn from $50bn) from the day it announced its EqualLogic acquisition to Monday’s announcement of the 3PAR purchase.