Apax goes double or nothing in big software bet

Contact: Brenon Daly

Apax Partners is going double or nothing in the latest addition to its software portfolio. The buyout firm plans to spend a total of $2bn to put together a pair of old-line ERP vendors, Epicor Software and Activant Solutions. And it is very much a ‘paired’ deal. In fact, according to terms, Apax closing its Activant purchase is a precondition of its planned take-private of Epicor.

That said, neither Apax’s purchase of Activant from its current private equity (PE) owners nor the buyout of Epicor should present much of a problem to get closed this quarter. But it does underline the necessity of cost ‘synergies’ in a deal (or in this case, two) for a mature company. (We noted that fact in the very similar proposed take-private of Lawson Software.)

If the double-barreled deals go through (as we assume they will), it would mark the end of a two-and-a-half-year effort by Elliott Associates to get Epicor sold. The hedge fund accumulated a 10% stake in Epicor in 2008 and then floated an offer of $9.50 for each remaining share of Epicor. It later trimmed that to $7.50 per share as the software company’s outlook deteriorated. (Epicor’s total revenue dropped 16% in 2009, and sales in 2011, while expected to increase, are still forecasted to come in below the level of 2008.) Apax is set to pay $12.50 per share for Epicor – an offer that Elliot has signed off on.

Mentor Graphic’s looming showdown

Contact: Brenon Daly

Lost in the din surrounding Carl Icahn’s recent effort to take out Lawson Software is the fact that the activist shareholder is already much further along with his stirrings against another target, Mentor Graphics. In less than two months, the electronic design automation company is slated to hold its annual shareholder meeting – a get-together where Icahn hopes to replace several board members as a way to spur a sale of the company. It’s shaping up to be a real showdown.

Last month, Icahn floated an offer of $17 for each of the roughly 112 million shares of Mentor, giving the unsolicited bid an equity value of $1.9bn. (Icahn already owns 15% of Mentor, which is nearly four times more than all the company’s directors and executives hold collectively.) Icahn has been joined in his efforts – in practice, if not officially – by another hedge fund, Casablanca Capital, which has a 5% stake in Mentor.

Mentor has told its shareholders to stick with its current board and strategy. In the proxy filed Tuesday, the company takes a swipe at Icahn’s efforts, saying his selections to the board lack ‘the collective knowledge, skill and experience’ of the current directors. Recall that Mentor’s ‘just say no’ defense successfully stymied an unsolicited bid from rival Cadence Design Systems nearly three years ago. Cadence pulled its offer just two months after launching it, but not before blasting Mentor for refusing to even open its books to a prospective buyer. We doubt that Icahn will go away as quickly and quietly if Mentor continues to stiff-arm him

Next to nothing for Novell

Contact: Brenon Daly

As bargains go, Novell’s valuation in the recently floated bid from a hedge fund is a bit like a ‘crazy Eddie’ discount. Earlier this week, Elliott Associates offered $5.75 for each of the roughly 350,000 shares for Novell. Altogether, the equity value totals about $2bn.

But the true cost of Novell is actually about half that amount because the company carries about $1bn in cash and short-term investments. (Don’t forget that some of that cash flowed from Novell’s good friends at Microsoft, which handed over some $350m in cash several years ago and is still buying more licenses.) So, at the current valuation, what does the $1bn buy?

Perhaps the most revealing way to look at it is that Elliott (or any other buyer, for that matter) would get more than $600m in rock-steady maintenance and subscription revenue, meaning the bid values Novell at a paltry 1.6 times maintenance/subscription revenue. And let’s be honest, that’s the most attractive asset at Novell. The business actually grew in the just-completed fiscal year, while revenue from both licenses and services declined. (License revenue plummeted 38% in the previous fiscal year, and continued to slide in the most-recent quarter, which ended January 31.)

Novell has said only that it is reviewing the bid. (It is being advised by JP Morgan Securities, which also worked with Novell on its purchase of PlateSpin two years ago. At $205m in cash, that was the largest acquisition Novell had done in a half-decade.) Meanwhile, the market has indicated that it expects Novell to go for a bit more than Elliott’s ‘crazy Eddie’ discount price. Shares have traded above $6 each since Elliott revealed its $5.75-per-share bid, changing hands at $6.07 each in mid-afternoon trading on Thursday.

At long last, Kana gets gone

Contact: Brenon Daly

Exactly three years ago, we bluntly wrote that there was no reason for Kana Software to be a public company, at least in its current form. Kana’s performance in the intervening 1,000 days since we published that report did nothing to change our view. If anything, as the red ink continued to gush at Kana, we became even more convinced of the need for a sale of the customer support software vendor. The sale finally happened Tuesday, with Accel-KKR agreeing to pay $49m in cash for most of Kana.

We were hardly alone in our assessment that Kana – a money-burning, Bulletin Board-listed company that also had negative working capital – should be cleared off the exchange. As we noted earlier this summer, Kana’s largest shareholder also wanted something to change at the company. KVO Capital Management, which had owned some 8.5% of the company, was pushing earlier this summer to get a director on the Kana board. KVO, which declined to comment, has agreed to back the sale to the buyout group, according to the release.

Empire Capital: rain-making in security M&A

Contact: Brenon Daly

For the second time in less than a year, a micro-cap security company in which hedge fund Empire Capital holds a big position is being taken off the board. On Monday, Entrust said it agreed to a $114m offer from buyout firm Thoma Bravo. Terms call for the acquirer to pay $1.85 for each of the 61.3 million Entrust shares outstanding. The roughly 22% premium essentially values Entrust where it was last October. (The deal also carries a ‘go-shop’ provision.)

Empire, which has a seat on Entrust’s board, holds about 11.8 million shares of the company, or 19% of the total. (That means the hedge fund’s payday for its stake will be just $22m.) Although the board has signed off on it, the terms of the buyout aren’t exactly staggeringly rich: Entrust has $24m in cash and no debt, lowering the company’s enterprise value to just $90m. Entrust did about $100m in sales in 2008 and was expected to record only a slight dip in revenue this year, according to Wall Street projections.

The valuation of less than 1x trailing revenue for Entrust is just half the level of Tumbleweed Communications, the previous security company that Empire was involved with. In a trade sale last June, Tumbleweed got picked up by French rival Sopra. The deal valued Tumbleweed at nearly 2x trailing sales. Of course, it was a different time back then. For its part, Entrust was trading at about $3 on the day Sopra announced the Tumbleweed acquisition.

Hedge fund goes tender on Epicor

The largest shareholder of Epicor on Wednesday took its unsolicited bid directly to shareholders, just one day after the ERP vendor nixed the offer. Two weeks ago, hedge fund Elliott Associates offered $9.50 for each share of Epicor, giving the proposed transaction a $566m equity value and $814m enterprise value. (Elliott says the all-cash bid is not conditional on financing.) Epicor officially shot down the proposal, asked shareholders to wait for its board to review the proposal. The tender offer is set to expire in a month, but can be extended. Elliott, which began buying the stock in June, owns 10% of the equity, plus a slug of convertible notes. Epicor shares closed Wednesday up 4 cents at $6.84.

Epicor: Thanks, but no thanks

Epicor has shot down an unsolicited offer from a hedge fund, confirming a move that the market had been expecting in the wake of the credit market collapse. The ERP vendor, which is being advised by UBS, told Elliott Associates that it wasn’t interested in the two-week-old bid of $9.50 for each share of Epicor. Although shares initially approached the $9 level on the news, the stock bottomed out at $6 last week. The gigantic spread reflects widespread doubt that Elliott and Epicor would strike a deal. With about 59 million shares outstanding, Elliott’s offer values Epicor’s equity at about $566m. In addition, Epicor holds $132m in cash and $380m in debt, giving the proposed deal an enterprise value of $814m. Elliott owns 12% of Epicor. We noted even before the credit bubble burst that Elliott might have a tough sell with Epicor.

Elliott elbows Epicor

Well, that didn’t take long. Just two days after we noted who won’t be bidding for Epicor, Elliott Associates tossed an offer of $9.50 per share for Epicor. The bid comes just two months after the hedge fund disclosed a large stake and began stirring for a sale of the old-line ERP vendor. With about 59m shares outstanding, Elliott’s offer values Epicor’s equity at about $566m. Additionally, Epicor holds $132m in cash and $380m in debt, giving the proposed deal an enterprise value of $814m. Epicor, which has seen substantial executive turnover this year, has struggled to record growth recently. However, the business has two attractive assets: a healthy maintenance revenue stream and solid cash-flow generation. Epicor shares closed Wednesday at $8.93, their highest level since mid-April.