Tag: Europe

A continuing M&A recovery in 2011

Brenon Daly

Contact: Brenon Daly

The choppiness that was felt in the overall M&A market in 2011 also came through in the totals for the year. While the number of transactions hit a five-year high, spending on tech deals in 2011 didn’t necessarily keep pace. The total value of transactions announced last year around the globe rose 17% to $219bn. Still, the increase in 2011 represented the second straight year of higher M&A spending following the dramatic decline in the recession of 2008-2009. However, the total for 2011 is only about half the value of deals announced in the previous years of the tech bull market.

Overall, dealmaking in 2011 started slowly, but then dramatically picked up in late spring and early summer. But that rebound stalled as uncertainty around European stability pushed out acquisitions, or canceled them altogether. The concerns knocked M&A spending in November to the lowest monthly level seen since the depths of the recession in February 2009. And while spending did rebound in December to a more typical level of nearly $20bn, the final few months of 2011 were hardly a robust time for significant transactions. Just one of the 10 largest deals of last year was announced in the final quarter of 2011.

Europe: Not the lost continent

Brenon Daly

Contact: Brenon Daly

Even as Europe appears increasingly likely to splinter under the weight of its unsustainable debt loads, there’s still a fair amount of shopping on the Continent. In fact, the $68bn worth of transatlantic transactions so far this year is the highest level in four years and equal to the combined value of European deals done over the previous two years. (To be clear, we’re talking about transactions where either the buyer or seller is headquartered in a western European country.)

Rather surprisingly, four of the 10 largest deals announced so far in 2011 have European accents. In three cases, the sellers were based in Europe (Autonomy Corp, Skype, Kabel BW) while SAP comes in as the sole big buyer, thanks to last week’s $3.65bn purchase of SuccessFactors. Even more surprisingly, two of those mammoth transactions have been announced since the debt crisis really took hold on the Continent.

If European leaders can move to stabilize the region – granted, that’s a big ‘if’ – then tech acquisitions should accelerate from their already high rate, at least according to the view of some dealmakers. Fully two-thirds of the more than 100 corporate development executives we surveyed over the past week said M&A activity will increase if Europe shows progress in ‘resolving or containing’ its debt crisis.

Valuations separated by more than the Atlantic

Brenon Daly

Contact: Brenon Daly

Comparing the valuations of US tech companies with their European counterparts, we can’t help but notice the fact that the recovery hasn’t been enjoyed equally on both sides of the Atlantic. We noted a few months ago that the strong US dollar had opened the way for some opportunistic shopping on the continent. Although most European currencies have inched back up since then, there are still discounts available because the valuations of the companies are still lagging their US peers and rivals.

Earlier this summer, we pointed out that discrepancy in Deltek Systems’ purchase of Maconomy, which valued the Danish ERP vendor at twice the level it started the year – but still below Deltek’s current valuation on the Nasdaq. Similarly, Adobe acquired Day Software at a price that was four times higher than the Swiss company’s own valuation last summer. However, Adobe’s own valuation is higher than the take-out valuation for Day, which included a 60% premium. (Adobe is still valued higher, even though it lost 20% of its value Wednesday after forecasting weaker-than-expected results.)

But those deals pale in comparison to the arbitrage that OpenTable did in its reach across the Atlantic for toptable.com. OpenTable values the British restaurant reservation service at basically 6 times trailing sales, while the San Francisco-based company trades at 19x trailing sales. (For those of you who haven’t looked lately, OpenTable trades in the mid-$60 range, commanding a market cap of some $1.5bn. Incidentally, various measures of OpenTable’s valuation – specifically, both trailing and forward price to earnings ratio – line up almost exactly with those of salesforce.com.)

OpenTable booking seats at negotiating table in Europe

Brenon Daly

Contact: Brenon Daly

Often when a company takes its business to a foreign country, something gets lost in translation. EBay found that as it looked to expand its online auctions internationally, and on a smaller scale, OpenTable ran into some of that as well. Roughly two years ago, the San Francisco-based online restaurant reservation service pulled out of both Spain and France. Even now, OpenTable’s international operation contributes only about 6% of total revenue as it burns money.

So, perhaps the thinking in its recent transatlantic move is: If you can’t beat them, buy them. In its first acquisition for geographic expansion, OpenTable said last week that it will pay $55m in cash for toptable.com, a UK reservation site. (Frankly, we have been expecting a move across the ocean by OpenTable since its IPO.) OpenTable has had its offering in the UK since 2004, but the company has acknowledged that the UK is its most competitive market.

While the acquisition should help bolster its presence there, we should note that OpenTable operates in a very different way than toptable.com. OpenTable looks to replace a restaurant’s existing reservation book, which is typically a pen and some paper, with the company’s proprietary electronic reservation book. On top of that one-time installation fee, OpenTable then charges a monthly subscription fee as well as making money each time a diner sits down at a restaurant table that was booked through the service. In contrast, toptable.com – along with other services that use the ‘allocation’ model – simply moves some of the available reservations online, with reservations there then recorded in whatever system the restaurant is currently using.

One advantage that toptable.com has, according to OpenTable, is that its approach is ‘lighter’ in that it doesn’t require an upfront hardware purchase. OpenTable is considering taking toptable.com and its allocation approach back into continental Europe, where toptable.com had started to move. If that organic expansion from its inorganic acquisition doesn’t take off, look for OpenTable to buy again. Germany, where OpenTable has had operations since 2007, looks like another market where OpenTable might want to reserve a few seats at the negotiating table.

Shopping hard in the City of Light

Brenon Daly

Contact:  Brenon Daly

On its visit to Paris, Francisco Partners brought home more than just a miniature souvenir Eiffel Tower. In the past week, the buyout shop has announced not one but two $100m deals struck in the French capital. Francisco’s unusual double dip comes at a time when the dollar, which had been at multiyear highs against the euro earlier in 2010, has slumped in recent weeks. (We recently looked at the trade winds blowing across the Atlantic.)

For Francisco, the transactions would help restock its European holdings. The buyout shop sold Swiss chip company Numonyx to Micron Technology for $1.3bn in May. In its first deal, Francisco put forward a $100m offer for the Grass Valley Broadcast business, which is being divested by Paris-based Technicolor. (The actual Grass Valley Broadcast business operates in central California, an ocean away from The City of Light.) In probably the more interesting move, Francisco picked up a majority stake in on-demand email marketing company Emailvision. The purchase gave Emailvision, which was advised by Pacific Crest Securities, a fully diluted equity value of about $109m.

NTT makes $3.2bn IT services play

Brenon Daly

Contact: John Abbott

Japanese telecommunications giant Nippon Telegraph and Telephone (NTT) has made a surprise offer for one of its existing partners, Dimension Data Holdings, an LSE- and Johannesburg Securities Exchange-listed IT services firm with roots in South Africa. This is an unusually large acquisition for a Japanese company, worth 120 pence per share, approximately £2.12bn ($3.2bn) in cash. That’s just over a 15 times EV/EBITDA multiple and 18x the closing share price before the announcement. (NTT has plenty of cash, with about $10bn on hand).

The Dimension Data board has recommended the offer and NTT has assurances from the directors and major shareholders Venfin DD Holdings and Allan Gray covering 52% of Dimension Data’s issued shares. The deal is expected to close by the end of October.

NTT cited the cloud computing opportunity as the main motivation behind the transaction. It brings to NTT specialist managed IT infrastructure and services capabilities that can now be rolled out on a global scale. NTT has its own managed network services, datacenters, system integration and mobile services, but Dimension Data adds to the development, operations and maintenance side of IT infrastructure, including network devices and servers running in customer sites. Geographically, NTT’s main strengths are in Asia, followed by Europe and the US; Dimension Data is strongest in Africa, the Middle East and Australia. NTT rival China Mobile has been making noises recently about investments in South Africa.

Dimension Data was founded in 1983 and listed on the JSE four years later. A series of acquisitions, including that of Plessey South Africa in 1998 and the European networking business of Comparex Holdings in 1999, helped it grow to over $2bn in revenue by 2003. (The deals have continued, with eight listed in The 451 M&A KnowledgeBase since 2004). At the end of fiscal 2009, revenue hit nearly $4bn and net profit was $135m. The company has 11,500 employees and more than 6,000 clients. JPMorgan Cazenove advised on the transaction for Dimension Data and Morgan Stanley for NTT.

Deltek deal shows Atlantic trade winds are blowing

Brenon Daly

Contact: Brenon Daly

As the hackneyed old phrase goes, there is opportunity in crisis. We were musing on that as we watched the euro plummet at the end of last week to a four-year low against the dollar. With countries such as Greece, Portugal and, most recently, Hungary unable or unwilling to run balanced books, much of the continent looks shaky. Reflecting the worries caused by the ballooning debt in many countries, the euro has shed 15% of its value compared to the US greenback.

While it is undoubtedly a tough time for many of our cousin countries across the Atlantic, some US companies might be having a different take on this period of European malaise: it’s a great time to do some opportunistic shopping. For starters, US buyers are getting a nice little discount thanks to the dollar. If, for instance, a US-based company was eyeing an acquisition in Europe that would have run it $150m at the start of the year, the current cost is less than $130m. And don’t forget that a lot of US companies have a lot of wampum sitting over in Europe that can’t be brought home without a heavy tax hit.

There’s also the fact that the recession hasn’t actually ended for many of the European companies, at least not based on their stock prices. Consider the smartly frugal bit of shopping that Deltek Systems did late last week. The project management software vendor had been looking to expand across the Atlantic, and found a handy bargain in picking up Danish ERP provider Maconomy. (Deltek was advised by Arma Partners.)

In its largest acquisition ever, Deltek will pay around $72m in cash for Maconomy. Even though the premium is substantial (Deltek’s offer is more than triple where Maconomy shares traded a year ago, and twice the price of the stock at the beginning of the year), the valuation of the target is actually lower than that of the acquirer. On an enterprise value basis, Deltek itself trades at about 2.1 times trailing sales, while it is paying just 1.5 times trailing sales for Maconomy. (And again, the valuation of the Danish software firm includes a generous premium.) Bargains like that may well get the trade winds blowing again across the Atlantic.

freenet: getting paid to sell

Brenon Daly

Contact: Brenon Daly

In a time when nearly all divestitures are done on the cheap, freenet’s recent sale of its mass-market hosting business Strato generated an unexpectedly rich return for the German telco. In fact, freenet more than doubled its money in the five years that it owned Strato. Back in December 2004, freenet handed over $177m ($107m in cash, $70m in equity) to German network equipment provider Teles for Strato. When freenet shed Strato to Deutsche Telekom (DT) two weeks ago, it pocketed $410m. (Arma Partners advised freenet on the divestiture.)

On top of that return, of course, freenet will hold on to the cash that Strato generated while owned by freenet. That’s not an insubstantial consideration, given that Strato ran at an Ebitda margin in the mid-30% range. We understand that Strato was tracking to about $50m in Ebitda for 2009, up slightly from about $46m last year. Revenue at Strato was also expected to show a mid-single-digit percentage increase in 2009, despite the tough economic conditions in freenet’s home market of Germany. DT’s bid values Strato at roughly 3x trailing sales and nearly 9x trailing Ebitda. That’s a solid valuation for corporate castoffs, which typically garner about 1x trailing sales and maybe 4-5x Ebitda.

Freenet’s divestiture of the Strato hosting business to DT comes a half-year after it sold its DSL business to United Internet, a sale that was also banked by Arma. The company has been looking to shed businesses as a way to pay down the debt that it took on for its $2.57bn acquisition of debitel in April 2008. Since that landmark deal, freenet has focused its operations on mobile communications, and had been reporting the DSL and Strato businesses separately. We understand that there may be additional divestitures by freenet, but they will be smaller transactions for more ‘ancillary’ businesses.

A transatlantic shopping trip for Concur

Brenon Daly

Contact: Brenon Daly

After being out of the M&A market for two years, Concur Technologies reached across the Atlantic earlier this week for a small Paris-based startup to help expand its business in Europe. Currently, business outside of the US accounts for about 10% of overall revenue at Concur. The company has indicated in the past that it plans to triple the level of international revenue in the coming years. Concur said it will pay up to $40m in cash and equity for Etap-On-Line (including unspecified earnouts), but guided not to expect much from the acquisition right now. (Deutsche Bank Securities advised Concur on the transaction.)

There are a number of reasons for the muted initial expectations for the purchase. First, much of Etap’s revenue will likely get washed out because of differences between French and US accounting standards. (Not that there was likely a lot of revenue to start with.) And even the sales that Etap has booked have come primarily from offering its travel and expense management software through licenses. That means Concur will have to convert the technology to its on-demand platform.

Of course, Concur knows a bit about that process, having transformed itself earlier this decade to an on-demand software provider from the license model. In the words of one banker, the transition was ‘a valley of death’ experience for Concur. But now the company has emerged from the valley and carries the rather alpine valuation of about 6 times fiscal year sales. (Concur currently has an enterprise value of about $1.5bn, compared to the projection of about $250m in revenue in its current fiscal year, which wraps at the end of September.) A number of other software firms quietly (and not so quietly) envy Concur’s makeover – and how it has played on Wall Street. Shares of Concur, which spent much of 2001 at less than $1, closed at nearly $37 on Thursday.

Software AG looks for a repeat

Brenon Daly

Contact: Brenon Daly, Dennis Callaghan

Having significantly whittled down the debt it picked up acquiring webMethods two years ago, Software AG is now ready to add on a bit more to cover its pending purchase of IDS Scheer. It plans to borrow some $470m and pay that back over the next three years or so. With Software AG’s steady cash generation, that shouldn’t be a problem. (The German company, which also pays a dividend, says it is on track to accumulate some $190m in free cash flow this year.)

In fact, we understand that capital questions hardly figured into the firm’s M&A plans, which it had trumpeted for the better part of two years. Instead, Software AG has simply been waiting for prices to come down. And based on the fact that it paid less than half the valuation for IDS Scheer than it handed over for webMethods, we’d say its patience paid off. (Additionally, it is about half the valuation that IBM paid for ILOG, which boosted Big Blue’s business process management portfolio.)

As a final thought on this week’s transaction, we suspect that if Software AG gets half the return on IDS Scheer that it got on webMethods, it’ll probably be pretty pleased with its new purchase. (Arma Partners advised Software AG on both deals.) WebMethods is now the vendor’s second-largest revenue producer. Moreover, the webMethods business expanded 33% in 2008 – twice the rate of overall revenue growth at Software AG last year.