Meru: Nasdaq or bust

At the rate networking companies are consolidating, there may be no one left to buy Meru Networks. Earlier this week, Hewlett-Packard satisfied its appetite for WLAN equipment by acquiring Colubris Networks. That deal comes just two months after rival Trapeze Networks got snapped up by Belden, a cable and wiring company.

But the deal that probably scotched any potential trade sale for Meru was Brocade’s $3bn gamble on Foundry. The reason: Foundry has an OEM arrangement with Meru and was viewed as the most-likely acquirer of the WLAN equipment startup. We’re guessing Brocade probably figures it has its hands full with integrating Foundry’s existing business without adding additional pieces. Also, we view the planned Brocade-Foundry pairing as focused primarily on the datacenter, which wouldn’t have much use for WLAN equipment.

The only suitor we can put forward for Meru at this point is Juniper Networks. While Meru’s enterprise focus would fit well with Juniper, we understand the two companies kicked around a deal in 2005, at a reported $150m, but talks didn’t go far. Besides, a Meru source indicated recently that the company is plugging away on an IPO for next year. (We’ve heard that from the company for more than two years , but maybe 2009 will be the year.)

For Meru to go public at a decent valuation, however, it needs both a healthy IPO market and a healthy comparable, Aruba Networks. That company is currently trading at half the level it was at the start of the year, following a blown quarter in February. Aruba will have a chance to make amends in two weeks, as it will report results from its fiscal year on August 28.

Recent WLAN deals

Date Acquirer Target Price
Aug. 2008 HP Colubris Not disclosed
June 2008 Belden Trapeze Networks $133m
July 2008 Motorola AirDefense $85m*

Source: The 451 M&A KnowledgeBase

Saving on services at HP

Like so much at Hewlett-Packard these days, CEO Mark Hurd seems to be succeeding where his predecessor, Carly Fiorina, failed. In this case, Hurd is set to buy outsourcing giant EDS in a $13.9bn deal. While Wall Street roughed up HP a bit, there wasn’t anywhere near the outcry that hit Fiorina when she tried to pull off her multibillion-dollar services deal in late 2000. Following the hammering from investors, Fiorina relented and backed away from her plan to pick up the consulting business at PricewaterhouseCoopers after just two months. (Of course, IBM ended up getting a bargain two years later on the PwC unit, paying $3.5bn for it in 2002. That was just one-fifth the amount HP was set to hand over.)

The goal of the moves by Fiorina and Hurd is the same: build up the services arm of the hardware-oriented company. (With 2007 revenue of $22bn, EDS would more than double the size of HP’s services business.) Hurd has already used that strategy in the company’s software portfolio, shelling out $4.5bn for Mercury Interactive to effectively double the size of that division. Of course, we suspect the support Hurd is enjoying for his planned acquisition has more to do with fiscal reasons than strategic ones. Paying less than 1x sales for EDS is a very ‘un-Fiorina’-like valuation. 

Rival moves in services

Acquirer Target Announced Deal value Target TTM sales
IBM PwC (consulting arm) July 30, 2002 $3.5bn (adjusted to $3.9bn) $4.9bn
HP EDS May 13, 2008 $13.9bn $22bn

Evercore’s short cycle

Investment banking, as everyone knows, is a cyclical business. In the case of Evercore Partners, the downswing lasted about a day. On Monday morning, CEO Roger Altman was on a call with disenchanted investors trying to explain why the company booked just half the amount of revenue in the first three months of this year that it did in the same period last year. (Setting aside the utter ridiculousness of projecting quarterly revenue on an advisory business, Evercore’s first-quarter revenue of $45m came in about one-third below the amount Wall Street had projected.) On the report, Evercore shares sank to their lowest level since the boutique bank came public almost two years ago.

By Monday afternoon, however, it was looking like Evercore was set to pocket tens of millions of dollars for the bank’s role in co-advising EDS on its $13.9bn sale to Hewlett-Packard. Depending on how Evercore and Citigroup divvy up the advisory fee, Evercore could end up taking home more money from its EDS mandate than it booked in the first three months of the year. (HP’s purchase is expected to close in the second half of 2008, so the success fees will flow after that.) We guess that’s what Altman, who worked firsthand on the EDS sale, meant when he said the bank’s backlog was ‘fine.’ Evercore shares, however, haven’t recovered and, in fact, are changing hands below where they were on Monday.  

Banking HP-EDS

Company Advisers
HP JPMorgan, Lehman Brothers
EDS Citigroup, Evercore Partners