Autonomy picks up piece of rock from Iron Mountain

Contact: Brenon Daly, Nick Patience

Announcing its first acquisition in almost a year, Autonomy Corp has picked up Iron Mountain’s digital assets in a surprisingly rich purchase of a castoff business. Autonomy will pay $380m in cash for the units, which include backup and recovery, e-discovery and digital-archiving software. The transaction effectively unwinds Iron Mountain’s acquisitions of Mimosa Systems and Stratify, deals the records giant had done as a hedge against the digitization of information. As my colleague Nick Patience writes in his report on the move in tonight’s Daily 451, the divestiture puts Iron Mountain almost entirely back in the business of storing cardboard boxes.

For Autonomy, we suspect that the main reason for the purchase is the division’s customer base of 6,000 as well as the six petabytes of data those customers have stored. (Autonomy already has e-discovery and archiving technology, so would be less interested in those Iron Mountain products.) Viewed in that light, the purchase price of $380m, or more than 2.5 times projected revenue in 2011, seems a bit steep. That’s particularly true when we consider that Iron Mountain was under the gun from big shareholders to dump the digital division. On the news, Iron Mountain shares inched a bit higher Monday afternoon, and have now added one-third in value since the beginning of the year.

Slimmed-down LSI catches eyes on Wall Street

Contact: Brenon Daly

Wall Street’s vote on NetApp’s purchase of the Engenio division from LSI is pretty clear: the seller got the better end of the deal. On an otherwise tough day on the market Thursday, LSI shares were one of the rare spots of green on trading screens as investors backed the company’s move to focus more on its chips business. The stock closed up 3%, with volume was more than twice as heavy as average. On the other side, NetApp slumped 6% on trading that was four times heavier than a typical day.

The reaction comes after LSI, advised by Goldman Sachs, announced plans after the closing bell Wednesday to sell its Engenio external storage systems business to NetApp for $480m in cash. (Over the past decade, LSI had several plans to spin off that unit in an IPO, but never managed to get it done.) The deal, which is expected to close within 60 days, continues a run of divestitures that LSI has undergone, including shedding divisions serving mobility and consumer products.

We would note that Engenio is garnering a valuation of just 0.7 times sales, a smidge below the more typical 1x sales seen in many divestitures. (For instance, when LSI shed its mobility products unit in mid-2007, that business garnered 1.2x trailing sales.) Still, the discount doesn’t seem to have mattered to Wall Street.

Trapeze’s long road to an obvious home

Contact: Brenon Daly

Two and a half years after a head-scratching sale to an unexpected buyer, Trapeze Networks has finally landed where it pretty much should have gone in the first place: Juniper Networks. The networking giant said Tuesday that it will hand over $152m in cash for the WLAN gear maker, with the deal expected to close before the end of the year. The price is actually $19m (or 14%) higher than Trapeze fetched in its sale in June 2008 to Belden. (That’s a reversal from most divestitures, which typically return dimes on the dollar compared to the original acquisition price.)

Trapeze’s combination with Belden was a bit puzzling from the start, so it’s not surprising to see the company, which is primarily known for its wiring products, unwind its purchase of a wireless vendor. In fact, it’s only surprising that Trapeze went through a period of ownership at a company other than Juniper. After all, Juniper had an OEM arrangement with Trapeze and even put money into the startup’s series D round of funding. We gather that Juniper was close to taking home Trapeze before it sold to Belden, but the two partners got snagged on a final price.

Since Trapeze sold for the first time, there have been a handful of exits for other WLAN providers. Most notably, Colubris Networks got snapped up by Hewlett-Packard and Meru Networks actually made it to the Nasdaq. Meru went public at $15 per share, which has been basically the midpoint of its trading range since its debut in late March. The stock also currently trades at about $15, giving Meru an equity value of roughly $240m, or about three times 2010 sales. Incidentally, Bank of America Merrill Lynch both led Meru’s offering and advised Juniper on its pickup of Trapeze.

More businesses on the block at LexisNexis?

Contact: Brenon Daly

When LexisNexis announced last month that it was selling off its HotDocs business, it got us thinking about other divestitures that the information provider may be contemplating. More specifically, we wonder if LexisNexis is considering reheating its effort to shed Applied Discovery. Not too long ago, we heard rumors that LexisNexis had hired a bank to help it unwind its $95m purchase of the Seattle-based e-discovery startup. LexisNexis picked up Applied Discovery in mid-2003.

According to one source, LexisNexis came close to selling Applied Discovery to the Silicon Valley-based buyout shop for about $70m, but talks collapsed during due diligence. Shortly after that, LexisNexis cut its asking price for Applied Discovery to basically half of the $95m that it originally paid for the company, but a second source indicated that the unit still didn’t generate much interest. The reason? Many would-be financial buyers are put off by the lumpy business in the e-discovery sector. Sales are typically driven by investigations or lawsuits, which can make it difficult to predict. Meanwhile, among the strategic buyers, many of the large information management vendors – including Autonomy Corp, Iron Mountain, Seagate and EMC, among others – have already announced acquisitions of e-discovery players.

Is IAC looking to sell

-Contact Thomas Rasmussen

It looks like acquisitive IAC/InterActiveCorp could be gearing up to undo its largest buy ever, At least Barry Diller’s opening remarks during IAC’s conference call last week seem to indicate a desire to explore the possibility. The New York City-based Internet media company has successfully expanded into a content giant by snapping up dozens of Internet properties. IAC has inked 36 deals worth more than $4.5bn since 2002. Many of those purchases have been tiny (, for instance), but IAC did make a significant pickup when it handed over $1.85bn for in March 2005.

However, we suspect that hasn’t delivered the kind of returns that IAC had hoped for, since the search engine remains far behind Yahoo, Microsoft and Google in terms of usage. Still, with roughly 4% of US search market share, would be a significant addition to any acquirer in the competitive scale-driven space, where every percentage point counts.

Though we won’t rule out a financial buyout, which would have more than a few echoes of the just-closed Skype carve-out, we think a strategic buyer for makes more sense. Two obvious suitors spring to mind: Google and Microsoft. Although Google recently made its intentions for more acquisitions known and even signaled a willingness to do large deals again, we do not think it is likely to pick up Rather than make a consolidation play, we expect Google to continue to snare startups to offer additional services to existing users, while also bolstering its recent moves into new markets such as online video and mobile communications.

On the other hand, Microsoft has displayed a willingness to spend a lot of money in its game of catch-up with Google. With an acquisition of coupled with its impending Yahoo deal, Microsoft could come very close to capturing one-third of all search traffic. While that would undoubtedly help Microsoft, a divestiture of could also benefit IAC. Granted, it would mean slicing its revenue roughly in half, but IAC would have a cleaner story to tell Wall Street. And it could use some help in that area. Investors give a paltry valuation to the cash-heavy company, valuing the business at less than one times sales on the basis of enterprise value. IAC sports a $2.6bn market capitalization, but holds $1.8bn in cash.

IAC’s historic acquisitions and divestitures, 2002 – present

Year Number of acquisitions Number of divestitures
2009 5 4
2008 7 0
2007 6 0
2006 3 0
2005 3 0
2004 4 0
2003 4 0
2002 4 0

Source: The 451 M&A KnowledgeBase

VeriSign’s bargain bin of deals

-Email Thomas Rasmussen

We’ve been closely watching VeriSign’s grueling divestiture process from the beginning. One year and $750m in divestitures later, VeriSign is largely done with what it set out to do. The company finally managed to shed its messaging division to Syniverse Technologies for $175m recently. Although we have to give the Mountain View, California-based Internet infrastructure services provider credit for successfully divesting nine large units of its business in about a year during the worst economic period in decades, we nonetheless can’t help but note that the vendor came out deeply underwater on its holdings. From 2004 to 2006 it spent approximately $1.3bn to acquire just shy of 20 differing businesses, which it has sold for basically half that amount. (Note that the cost doesn’t include the millions of additional dollars spent developing and marketing the acquired properties, nor the time spent on integrating and running them, which undoubtedly hurt VeriSign’s core business.)

Aside from the lawyers and bankers, the ones who really benefitted from VeriSign’s corporate diet were the acquirers able to pick up the assets for dimes on the dollar. And in most cases, the buyers of the castoff businesses were other companies since the traditional acquirers of divestitures (private equity firms) were largely frozen by the recent credit crisis. The lack of competition from PE shops, combined with the depressed valuations across virtually all markets, means the buyers of VeriSign’s divested businesses scored some good bargains. Chief among them are TNS and Syniverse, which picked up the largest of the divested assets, VeriSign’s communications and messaging assets, respectively. Wall Street has backed the purchases by both companies. Shares of TNS have quadrupled since the company announced the deal in March, helped by a stronger-than-expected earnings projections this year. More specifically, Syniverse spiked 20% on the announcement of its buy, which we understand will be immediately accretive, adding roughly $35m in trailing 12-month EBITDA.

VeriSign’s divestitures, 2008 to present

Date Acquirer Unit sold Deal value
August 25, 2009 Syniverse Technologies Messaging business $175m
May 26, 2009 SecureWorks Managed security services $45m*
May 12, 2009 Paul Farrell Investor Group Real-Time Publisher Services business Not disclosed
March 2, 2009 Transaction Network Services Communications Services Group $230m
February 5, 2009 Sinon Invest Holding 3united Mobile Solutions $5m*
May 2, 2008 MK Capital Kontiki Not disclosed
April 30, 2008 Melbourne IT Digital Brand Management Services business $50m
October 8, 2008 News Corporation Jamba (remaining 49% minority stake) $200m
April 9, 2008 Globys Self-care and analytics business Not disclosed

Source: The 451 M&A KnowledgeBase *451 Group estimate

Emptoris shrugs off possible fine, goes shopping

Contact: Brenon Daly

A little more than four months after selling to Marlin Equity Partners, Emptoris reached into the deep pockets of its buyout shop owner to fund its first acquisition: the recent pickup of the contract and service management business from Click Commerce. The deal was part of a larger divestiture of Click Commerce by Illinois Tool Works (ITW), effectively unwinding its September 2006 acquisition. In all, three Click Commerce units went to Marlin, with only the contract and service management unit getting slotted under Emptoris.

As we noted when ITW announced the divestiture last October, Click Commerce was a puzzling purchase for ITW, a 96-year-old company that makes everything from commercial ovens to industrial packing tape to arc welders. ITW paid $292m for Click Commerce in 2006. Although terms weren’t disclosed, we understand that the unit Emptoris acquired was generating some $15m in sales. With the additional revenue, we estimate that Emptoris would be running north of $50m.

Whatever size the check that Emptoris wrote for the Click Commerce division, we would note that one insider at rival Ariba quipped that Emptoris better not spend all ‘our’ money. The Ariba source was needling its rival about the fact that a patent lawsuit between the two companies is currently in the final stages. A jury has awarded – and the court has affirmed – some $6m in damages to Ariba. Emptoris is appealing the judgment.

EBay unwinds and adds on

Contact: Brenon Daly

For a company that essentially matches buyers and sellers, eBay has been doing a lot of dealing of its own this week. It has picked up a controlling stake in Gmarket, the South Korean online auction house. When we wrote about this possible deal in mid-August, we noted that eBay was willing to pay a not-insignificant premium for Gmarket. Makes sense, given that international sales have been growing more than twice as fast as US sales in recent quarters. (Ebay reports first-quarter earnings next Wednesday.)

The acquisition of a chunk of Gmarket, which is eBay’s first purchase since November, comes as the company also moved to unwind a pair of previous purchases. In the more straightforward of the two, eBay said it will sell StumbleUpon back to the founders of the online bookmarking site. The divestiture comes two years after eBay paid $75m for the property.

We would note that the deal is actually the second sale of an online bookmarking site in the past month. In mid-March, LookSmart divested its Furl property to Diigo, picking up an undisclosed chunk of equity in its privately held rival. While neither transaction performed as the acquirer had hoped, LookSmart did indeed look smarter than eBay because it paid only $1m for its flier on Furl, compared to the $75m that eBay handed over for StumbleUpon.

Rather than go the same route of divesting to former owners, eBay hopes to find a whole new set of buyers for its planned unwinding of Skype. It plans to spin the VoIP vendor to public market investors next year. (We’ll withhold comment on the rather unconventional ‘dual track’ that eBay has now set up for Skype. Just as we’ll withhold comment on the fact that ‘Skype’ rhymes with ‘hype.’)

If it’s lucky, eBay may see the division valued at about half of the $4.1bn that it spent on Skype (including earnouts) back in September 2005. EBay has already acknowledged that it overpaid for Skype, writing down some $1.4bn of the purchase price. While reports have indicated that Skype’s initial founders may be trying to repurchase the company from eBay (a la StumbleUpon), it appears those talks have ended. Still, we could very well see Skype getting snapped up in a trade sale before it hits the public market next year. In a mid-October report, we noted that any of the telcos or even Nokia might be interested in owning the largest VoIP provider.

eBay deal flow

Year Deal volume Deal value
2009 0* $0*
2008 4 $1.5bn
2007 3 $385m
2006 2 $75m
2005 7 $5.1bn

Source: The 451 M&A KnowledgeBase *Excludes purchase of controlling stake of Gmarket

Corporate castoffs

Look who’s hitting the corporate garage sales these days – other corporations. While divestitures used to go most often straight to private equity shops, more than a few castoff businesses are now finding homes inside new companies. The latest example: AMD’s sale of its digital TV chip division Monday to Broadcom for $193m.

Given AMD’s struggles, as well as the fact that rival Intel has shed a number of businesses in recent years, the divestiture wasn’t a surprise. In fact, my colleague Greg Quick noted two weeks ago that AMD was likely to dump its TV chip business, naming Broadcom as one of the likely acquirers.

On the buy side, Broadcom joins fellow publicly traded companies Overland Storage, L-1 Identity Solutions and Software AG, among others, that picked up properties from other listed companies this year. That’s not to say that buyout firms have been knocked out of the market, despite the tight credit conditions. PE shops Vector Capital, Thoma Cressey Bravo and Battery Ventures have all taken businesses off the books of publicly traded companies in 2008.

Still, the activity by the corporate shoppers is noteworthy. And the list is likely to grow as more companies look to clean up their operations during the lingering bear market. The next name we may well add to the list is Rackable Systems, which said earlier this month that it is looking to shed its RapidScale business. (The divestiture would effectively unwind its acquisition two years ago of Terrascale Technologies, and comes after a gadfly investor buzzed Rackable for much of the year.)

As to who might be eyeing the assets, we doubt there are many hardware vendors interested in RapidScale, because they have either made acquisitions (Sun’s purchase of Cluster File Systems, for instance) or have partnerships (both EMC and Dell partner with Ibrix). However, a service provider could use the technology to enhance its storage-as-a-service offering. In a similar move, we’ve seen telecom giants like BT and Verizon pick up security vendors to offer that as a service. And finally, we’d throw out a dark horse: Amazon, which is one of Rackable’s largest customers, could use RapidScale’s clustered storage technology to bolster its S3 offering.

Sizing up Secure Computing

In many ways, Secure Computing’s divestiture of its authentication business to Aladdin Knowledge Systems raises more questions than it answers. Secure’s rationale for the sale is pretty simple: pay down some debt and get out of a sideline business that’s dominated by RSA and has a solid number two in Vasco Data Security. (For the record, Vasco is about four times the size of Secure’s SafeWord business and runs at a highly respected 25% operating margin.)

So it’s pretty clear why Secure was a willing seller (in fact, we hear that Secure had been a willing seller of the business for more than a year). Less clear is why Aladdin was a willing buyer of the property – at a relatively rich price of 2x sales, no less. Aladdin investors chose not to stick around for the company’s explanation of why it was willing to shell out two-thirds of its cash holdings for a product line in a cutthroat market. They fled the stock, trimming 14% off the price and sending Vasco to its lowest level since January 2004.

Of course, Secure has had an even rougher run of it on the market recently, as the company has come up short of Wall Street estimates for the past two quarters. Shares of Secure currently change hands lower than they have at any point during the past half-decade. Since the beginning of the year, the stock has shed 60%, a decline that recently cost longtime CEO James McNulty his job.

The long, uninterrupted slide in Secure’s valuation raises an even larger question about the divestiture: Was the sale of SafeWord just a prelude to an outright sale of the company itself? The numbers certainly don’t work against a deal. In fact, Secure is currently valued at basically 1x sales – just half the level it got for the divested property. (Usually, it’s the reverse, with corporate cast-offs getting sold at less than half the overall company’s valuation.)

Any planned acquisition, however, would probably have to go through Warburg Pincus, which holds the equivalent of about 7% of Secure’s common stock, going back to a financing deal it struck to help Secure buy CipherTrust in July 2006 for $264m. Warburg invested $70m at a time when Secure stock was trading at about 3x higher than it is now. With Warburg that far underwater on its holding, we can only imagine the pointed questions the private equity firm will ask Secure.