Push-back on the markdown

Rather than the current M&A market being a place where buyers and sellers meet on more or less equal footing, current deals clearly show that acquirers have the upper hand (if you’ll forgive the mixed anatomical metaphor). We’ve already noted how some would-be buyers have pushed for ‘recalibrations’ in deal prices and, for the most part, have gotten these discounts.

However, one target isn’t just sitting by for a markdown. I2, which agreed to be acquired by JDA Software Group in mid-August, has told its bargain-minded buyer that it plans to hold to the original terms of the deal. Under those terms, i2’s common shareholders would pocket $14.86 for each share. (There are also payments to satisfy i2 convertible holders, giving the proposed transaction an enterprise value of $346m.)

I2 shares traded close to the bid up until Wednesday, when JDA told i2 it wanted the company to delay its shareholder vote. I2 went ahead and held the meeting as scheduled Thursday, with more than 80% of shareholders voting for the deal. The company says it has done everything it needed to do to close the deal and ‘expects’ JDA to do the same. The market doesn’t share that expectation. Instead, it anticipates that JDA will trim its bid. I2 shares dropped $4 on Wednesday and sank again on Thursday, closing at $9. That’s almost 40% below the original offer price. In case anyone is curious, terms call for a breakup fee of $15m or $20m, depending on the split.

Smoothing the spread

With the stock market in turmoil, more than a few deals have seen a gulf widen between the current price of a would-be target and its proposed takeout price. So the question becomes: How to smooth the spread? Well, two different approaches – with wildly different results – seem to support the idea of disclosure, with more being better. Wall Street, apparently, is a little skittish these days.

A month ago, JDA Software took the unusual step of issuing a press release to assure Wall Street that it can actually pay for its PE-style acquisition of i2. Originally, JDA was banking on Wachovia to help fund its purchase. But as that bank came undone, Wells Fargo stepped in to join Credit Suisse as the lenders to JDA. That deal, which was launched in mid-August, goes to i2 shareholders a week from Thursday. Meanwhile, i2 shares are currently changing hands at about $14, compared to JDA’s bid of $14.86.

Contrast that clarity with the cloudy situation surrounding Brocade Communications’ planned purchase of Foundry Networks. When Brocade unveiled its ‘Cisco-killer’ acquisition in July, it said it would pay $18.50 in cash plus a sliver of stock for each Foundry share. The networking equipment maker’s stock traded near the bid until a disastrous decision Friday to delay its shareholder vote on Brocade’s offer, citing ‘recent developments.’

While the company may have had its hands tied about what it could say about these ‘developments,’ the ominous move spooked the market. Concerns immediately arose about Brocade being able to pay for the $3bn acquisition, given the tight credit market, as well as the SAN vendor perhaps knocking down its offer price. Shares are now changing hands at $13.36 – almost exactly where they were before Brocade launched its bid three months ago. We’ll see if the initial offer holds up when Foundry shareholders vote on the deal Wednesday afternoon.

Big buyers sit out Q3 uncertainty

With the third quarter in the books, we get our first glimpse of the impact that the unprecedented upheaval on Wall Street is having on tech M&A. Over the past three months, the value of tech deals dropped about one-third from year-ago levels, sinking from $58bn to $37bn.

The falloff was even more pronounced at the high end of the market: only six deals worth more than $1bn were announced during the July-September period, down from 11 deals worth more than $1bn during the same period last year and 22 deals worth more than $1bn during the third quarter of 2006. (Along those lines, IBM has acquired just one public company so far this year, down from three last year.)

There are a number of reasons for the muted deal flow, starting with the barren conditions in the credit market. That knocked the number of leveraged buyouts from 36 in the third quarter of last year to just 12 this year.

Strategic acquirers, too, faced their own difficulties in striking deals as they got clubbed on the Nasdaq. Consider Google, which saw its shares bottom out at the end of the quarter at a three-year low. So far this year, the online ad giant has inked just four deals, down from 14 during the same period last year. Or Citrix, which recently saw its shares reach their lowest level since mid-2005. The enterprise software company has scaled back its acquisitions, picking up a product line and a tiny German company so far this year, after closing five deals during the first three quarters of 2007. See full report.

Third-quarter deal flow

Period Deal volume Deal value
Q3 2005 811 $87bn
Q3 2006 1,030 $102bn
Q3 2007 822 $58bn
Q3 2008 691 $37bn

Source: The 451 M&A KnowledgeBase

JDA: No really, we can pay for it

In a sign of how rocky the credit market has become, JDA Software Group took the highly unusual step Tuesday afternoon of issuing a press release to confirm that it has the financing to pull off its planned $461m acquisition of supply chain management vendor i2 Technologies. Among other moves, JDA added Wells Fargo to the loan syndicate. According to terms of the early August deal, JDA was planning to borrow up to $450m from Credit Suisse and Wachovia. As Wachovia reeled due to its own risky loan portfolio, market participants began questioning Wachovia’s ability to help finance JDA’s purchase. That uncertainty knocked i2 shares, which were trading near JDA’s bid of $14.86 earlier this month, to as low as $11.50 on Wednesday. The stock snapped back after JDA’s release hit the wire, rebounding to about $13.50 on Tuesday afternoon. (As an aside, we wonder how many arbs got crushed in that swing.) i2 shareholders are slated to vote on JDA proposed deal on Nov. 6.

M&A goes MIA in Q2

With the second quarter wrapped up, we’ve been busy tallying the deal flow from the period. As you might guess, M&A levels for the past three months mirror the dour economic climate. The quick numbers: Overall tech M&A fell 40% in the second quarter, year-over-year, dragged down by private equity players that have been knocked out of the market by the credit market turmoil. The total shopping bill of $148bn is a sharp decline from the $241bn in the same period last year, putting it only slightly above the $122bn recorded in the second quarter of 2006.

A number of trends shaped M&A in the quarter, including the continued use of bear hugs to pressure reluctant sellers, the frozen IPO market and the rise of consolidation deals. Of course, the single largest crimp on deal-making in the second quarter was the utter disappearance of tech buyouts. The value of tech LBOs in the second quarter fell more than 90% compared to the same period last year, when credit was flowing freely. In the just-completed quarter, we recorded some $7bn worth of tech buyouts, down from $85bn in the year-ago period. Looked at another way, LBOs accounted for just 5% of all tech M&A spending in the second quarter, after representing a full one-third of total spending in the same period last year.

Deal flow breakdown

Quarter PE deal value Corp. deal value Total deal value
Q2 2006 $13bn $109bn $122bn
Q2 2007 $85bn $156bn $241bn
Q2 2008 $7bn $141bn $148bn

Source: The 451 M&A KnowledgeBase