Quiet close to Micro Focus-Borland after noisy process

Contact: Brenon Daly

After more than two months of back-and-forth negotiations, Micro Focus is set to take home Borland Software. Shareholders in Borland approved the $113m deal on Wednesday and Micro Focus shareholders signed off on it on Friday. Originally announced on May 6, the acquisition is set to close early next week. Along the way, Micro Focus had to pay 50% more than it originally bid, but still picks up the application lifecycle management vendor for just 1 times its sales.

The reason Micro Focus had to reach deeper into its coffers is that after the parties initially agreed to the transaction, at least two other shoppers popped up with offers of their own. Or more accurately, the would-be buyers indicated that they were interested in bidding. We already noted our suspicion that one of the pair was the recently launched 2SV Capital, although the firm didn’t pursue the nonbinding bid beyond an initial query.

As for the identity of the other suitor, which was identified only as Company A in US Securities and Exchange Commission filings, it turns out we were off with our guess of Embarcadero Technologies. In fact, we were off by about 3,000 miles. A source indicated that the mystery bidder was in fact Allen Systems Group, which has its headquarters in Naples, Florida. The privately held company has done some 30 acquisitions over the two decades it has been in business. We understand that the firm may have had trouble lining up the financing to top Micro Focus’ offer for Borland, which has an enterprise value of $164m. Allen Systems didn’t return several messages seeking comment.

UPDATE: Borland gets higher bid

In a note sent out to clients before the market closed Thursday, we speculated that Borland was likely to get a bid that topped its existing agreement with Micro Focus. (See the full post.) Shortly after the market closed, Borland indicated an unidentified suitor (Company A) raised its bid to $1.25 for each share of Borland, eclipsing the $1.15 per share that the boards of both Borland and Micro Focus have agreed to. Borland shareholders had been scheduled to vote on the deal, which was originally announced May 6, on July 22. The identity of Company A wasn’t revealed. In our earlier post, we noted our suspicions that the bidder might be Embarcadero Technologies, a portfolio company of Thoma Cressey Bravo. However, one informed source has subsequently told us that is not the case.

A new bid for Borland?

Contact: Brenon Daly

Nearly a month after Micro Focus and Borland announced their planned combination, a pair of after-the-fact bidders pushed Micro Focus to reach a little deeper into its pockets for the application lifecycle management vendor. Now we’re hearing that one of the mystery suitors may well come back with a higher offer. As it stands, Borland shareholders are set to vote on Micro Focus’ bid of $1.15 in cash for each Borland share, or a total of some $92m, on July 22.

However, several sources have indicated that one unidentified party that previously floated a range of $1.10-1.20 per Borland share may well be preparing a bid that would top the existing offer from Micro Focus. The identity of that suitor has never been revealed, and is referred to as ‘Company A’ in the proxy filings. (We suspect, but have not confirmed, that Company A could be Embarcadero Technologies, which went private two years ago in a $200m buyout by Thoma Cressey Bravo. Following a split, TCB now goes by the name Thoma Bravo.) The proxy adds that Company A originally approached Borland with an unsolicited offer in June 2008, and has been more or less present during the process since then. Borland has dismissed several rounds of interest by Company A because of questions about its ability to pay for the deal.

While Company A may or may not come back with a higher offer, the other suitor that emerged after Micro Focus and Borland agreed to their deal – an unnamed private equity firm referred to as ‘Company E’ – will not be dusting off its bid, according to the proxy. Company E has never been identified, but we have a pretty strong suspicion that it could be a recently launched investment firm in the Boston area called 2SV Capital. Calls to the firm weren’t returned.

Certainly, a number of signs point to 2SV Capital as one of Borland’s mystery bidders. Two of the three partners in the firm certainly know the Borland business well, having worked together on the sale of Segue Software in early 2006 to Borland. (As we noted in a recent report on the pending sale of Borland, the Segue business is essentially the main reason why Micro Focus is interested in Borland.) 2SV Capital founder Richard Vieira, who was then working for Jefferies & Co, advised Segue, which was at the time headed up by Joe Krivickas, on the sale to Borland. (Krivickas recently joined Vieira at 2SV Capital.) If indeed 2SV Capital were interested, we suspect the buyout shop wouldn’t have needed to spend too much time on due diligence, given their understanding of the business.

Auction action

Contact: Brenon Daly

With one bidding war over a Nasdaq-traded company wrapped up last week, two new skirmishes broke out on Monday. Both Borland and MathStar received conditional offers of higher prices than had previously been floated for the companies. The bid-and-raise process at both these otherwise-neglected companies indicates the M&A market has recovered notably from its low point earlier this year.

In the larger of the two transactions, Borland said in a proxy filed in support of its existing agreement to sell to Micro Focus that it has received a nonbinding ‘expression of interest’ from an unnamed buyout shop. The offer – which is conditional on the firm completing due diligence on the application lifecycle management software vendor – has the firm paying $1.20 for each share of Borland. That tops Micro Focus’ offer in early May of $1 for each share of Borland.

Micro Focus’ bid, which has been blessed by the boards of both companies, came after it first showed interest in picking up Borland in July 2007, according to the proxy. Meanwhile, the proxy indicated that the unnamed financial acquirer only contacted Borland on May 21 of this year. The buyout firm added that due diligence would take about two weeks, and that its offer was not conditional on financing. Borland said in the proxy that it has opened its books to the unnamed suitor.

Meanwhile, after being in play for more than a half a year, MathStar attracted the interest of Tiberius Capital, a Chicago-based fund that offered to buy half of the company at $1.15 per share. That tops an existing offer of $1.04 for each MathStar share from another company. We would note both of these deals come after a seven-week bidding war over SumTotal Systems, which saw the final price soar 50% above the opening bid.

What’s the return on Borland’s M&A?

Contact: Brenon Daly

Looking a bit closer at Micro Focus’ $75m acquisition earlier this week of Borland Software, my colleague John Abbott noted that the British company was essentially picking up the Segue Software business that Borland itself bought three years ago. Borland paid $100m, or an enterprise value (EV) of $86m, for the testing and quality assurance tools vendor, which worked out to about 2.3x EV/trailing 12-month (TTM) sales. The purchase of Segue in February 2006 came as part of a larger overhaul of its business, which included Borland ditching its developer tools division.

Fast-forward three years, and Segue is being valued by Micro Focus at just 80% of the amount that Borland paid for it. If we look at Borland’s overall EV of just $67m, the contrast is even starker. Micro Focus is paying a mere 0.7x EV/TTM sales for Borland, which is just one-third the multiple that Borland shelled out for Segue. This isn’t to pick on Borland or knock it for agreeing to sell itself for $1 per share, which is probably as good an outcome as it could have hoped for.

However, the valuation gap does highlight a larger problem in realizing value through M&A. Consider that since 2002, Borland – under various chief executives – has spent more than $300m on nearly a dozen deals. And yet, when all of the firm’s dealmaking was priced by another market participant (in this case, Micro Focus), the aggregate value was actually two-thirds lower. Granted, Borland was shopping in a different time than our current recession, which has obviously pushed valuations down these days. (And the valuation decline is nowhere near as drastic as we’ve seen elsewhere in the market, such as the bankruptcy of Nortel Networks, a company that was once worth more than $200bn.) Still, it’s always worth noting the price a company pays when it buys and the price it gets when it ultimately sells.

Select Borland acquisitions

Date Target Equity value
February 2006 Segue Software $100m
October 2002 TogetherSoft $185m
October 2002 Starbase $24m

Source: The 451 M&A KnowledgeBase

Trans-Atlantic transactions take off

Contact: Brenon Daly

It was a big and busy day on Wednesday for British companies shopping in the country’s former colony across the Atlantic. Collectively, the three deals boosted the total disclosed value of acquisitions by UK-based firms so far this year by nearly 20%. For starters, LSE-traded software vendor Micro Focus picked up one full Nasdaq-listed company and bits of another US public company, spending a total of about $155m. Taken together, the simultaneously announced deals are the second-largest transaction announced in 2009 by a UK-based buyer. Adding to that, British defense giant QinetiQ reached for a well-funded security startup in a deal that features a handsome valuation and a pretty rich possible earn out.

In the more significant purchase, Micro Focus picked up long-ailing Borland Software for $1 per share, or an equity value of about $75m. In the same breath, it also scored a business line from Compuware for $80m. Micro Focus says the addition of Compuware’s application testing/automated software quality (ASQ) unit will help bolster its existing ASQ offering, a suite of tools that it sells under the Data Express name.

One of the more interesting aspects of Micro Focus’ double-up deal is that the company tapped Arma Partners to run both processes. (The transaction was headed up by Arma’s Paul-Noël Guély, along with Keith Robinson, Varun Sunderraman and Graham Smith.) Arma has served as a kind of house bank for Micro Focus, advising on four of the company’s past five deals. On the other side of the table, Updata Advisors worked with Compuware on its divestiture and JP Morgan Securities advised Borland. We’ll have a full report on the moves by Micro Focus in Thursday’s 451 Group sendout.

In a separate transaction, QinetiQ (through its North American arm) moved deeper into the cyber-intelligence world by buying Cyveillance. Terms call for QinetiQ to hand over $40m upfront, along with a possible $40m earn out over the next two years. Cyveillance, which we understand didn’t use a banker, generated sales of about $10m in 2008. Look for a full report on the relatively richly valued transaction in tonight’s 451 Group MIS email.