HP buys big

Contact: Brenon Daly

Earlier this week, Hewlett-Packard closed its $3.1bn acquisition of 3Com. It was a significant shot at the company’s new rival Cisco Systems, adding additional networking and security products to HP’s ProCurve portfolio while also dramatically increasing its business in Asia (3Com generates roughly half its sales in China). The deal was announced on November 11, and closed on Monday.

What’s interesting is that HP, which was once a fairly steady dealmaker, has been out of the market since that purchase. Its rivals, however, haven’t been on the sidelines. In the five months since HP announced the 3Com buy, IBM has inked five deals, Dell has announced two transactions and Cisco has picked up one company. Of course, some of HP’s inactivity could be chalked up to its efforts to digest 3Com, which stands as the company’s fourth-largest acquisition. (On the other side, Cisco knocked out a pair of $3bn purchases in just two weeks in the month before HP reached for 3Com.)

But we understand from a couple of different sources that although HP is looking to do fewer deals, they will be larger. The shift has actually been taking place for some time at the company. In 2007, like a number of cash-rich tech giants, HP was basically knocking out a purchase each month. That pace slowed to just five deals in 2008, including the landmark acquisition of services giant EDS. Last year, HP bought just two other companies besides 3Com. It looks like the company, which is tracking to more than $120bn in sales this year, has realized that the big get bigger by buying big.

Profiting from the battle for the datacenter

Contact: Brenon Daly

Although the battle between Hewlett-Packard and Cisco Systems over outfitting datacenters is still playing out, some winners have already emerged. First and foremost, the shareholders of 3Com have benefitted tremendously from the turf war between the two tech titans. On Wednesday, HP said it is picking up 3Com for $3.1bn, bolstering its ProCurve lineup with 3Com’s switches and routers, which are Cisco’s core products.

Terms call for HP to hand over $7.90 in cash for each share of 3Com. That’s roughly 50% higher than 3Com shares garnered in an unsuccessful buyout two years ago and nearly four times the price of 3Com stock just one year ago. Additionally, it means that anyone who bought shares in 3Com over the past half-decade will be above water on their holdings when the sale to HP closes in the first half of next year. We can’t say that we’ve seen many situations like that in recent transactions. In most cases this year, the sale prices of public companies – particularly those that have faded in recent years, like 3Com – have been below the market prices they fetched back in 2007. And that was before any takeout premium.

But there are other parties that stand to come out ahead in the HP-3Com deal, as well. We have to imagine that the bankers at Goldman Sachs are glad (if not relieved) to have their client, 3Com, looking likely to have finally been sold. Goldman was advising the networking vendor back in 2007 on its proposed sale to Bain Capital and Huawei Technologies, which dragged on for a half-year before being scuttled due to national security concerns. There are success fees and then there are well-earned success fees.

Meanwhile, on the other side of the desk, Morgan Stanley also has reason to celebrate its work with HP. Not only is the pending purchase of 3Com the largest enterprise networking transaction since mid-2007, but the deal continues a strong recent run by Morgan Stanley. This week alone, the bank advised HP on its $3.1bn purchase of 3Com, AdMob on its $750m sale to Google and Logitech on its $405m acquisition of LifeSize Communications. Altogether, that means Morgan Stanley has had a hand in three of the four largest deals this week.

Nordic freeze-out for Cisco

Contact: Brenon Daly

With a fat treasury and well-drilled deal team, Cisco Systems typically storms through acquisitions. Over the past five years, the networking giant has announced some 50 purchases, including more than a few that combined big money and quick moves. (For instance, several sources have indicated that Cisco snatched WebEx Communications away from IBM in just a week, after Big Blue had the online conferencing company all but locked up.) But it appears that something in Cisco’s M&A methods has been lost in translation in its reach across the Atlantic for Norway’s Tandberg.

A little over a month ago, Cisco announced plans to hand over $3bn in cash for Tandberg, as a way to bolster its videoconferencing lineup. Although Tandberg’s board of directors backed the offer, a fair number of shareholders have balked at what they see as Cisco’s low-ball bid. Critics point to the fact that Cisco’s all-cash offer values Tandberg just 11% higher than the company’s closing stock price the day before the announcement. (We noted recently that the premium was just half the amount that Cisco is paying for Starent Networks, which was announced a week after Tandberg.)

Further complicating Cisco’s play for Tandberg is the fact that 90% of shareholders at the Norwegian company have to agree to the deal. Already, holders of about one-quarter of Tandberg equity have said they won’t support Cisco’s proposed purchase – at least not at its current valuation. We suspect that Cisco may well end up having to reach a bit deeper to land Tandberg. (The company gave itself more time on Monday, bumping back the expiration of its tender offer for Tandberg until November 18.) And as the standoff drags on, other vendors are closing their own videoconferencing deals. On Wednesday, Logitech said it will spend $405m in cash for LifeSize Communications. Logitech’s bid values LifeSize at slightly more than 4x trailing sales, which is not out of line with Cisco’s bid for Tandberg of 3.6x trailing sales.

It wouldn’t be surprising to see Cisco top its existing offer for what’s undoubtedly a valuable asset. Tandberg would give Cisco a solid mid-level videoconferencing offering, slotting nicely between its high-end Telepresence product and the low-level Web conferencing and collaboration offering it got when it picked up WebEx. In terms of markets, adding Tandberg would significantly expand Cisco’s reach in Europe, particularly with government customers. And as a bonus, securing Tandberg would prevent the target from landing with rival Hewlett-Packard, which has its own videoconferencing wares. (Although HP actually beat Cisco to market with its Halo product, it has little to show for its early advantage.) We doubt that would happen, but wouldn’t it be a kicker if HP pulled a Cisco on Cisco, quickly firing off a topping bid and walking away with Tandberg?

Brocade on the block? Of course it is

Contact: Brenon Daly, Simon Robinson

Having recently marked the anniversary of its largest-ever acquisition, Brocade Communications may now find itself on the other side of a transaction. At least that’s the speculation from The Wall Street Journal, which reported Monday that the storage and networking giant has retained a banker (reportedly Frank Quattrone’s Qatalyst Partners) to shop it. While the report was enough to goose the stock to its highest level since June 2008 (shares were up 15% to $8.82 in Monday-afternoon trading), it’s worth pointing out that being shopped is a long way from getting sold.

It’s also worth mentioning that speculation about Brocade being in play is nothing new. As my colleague Simon Robinson noted in late March, the consolidating networking landscape makes Brocade a likely target. (After all, Brocade itself is an example of the consolidation. A traditional SAN networking provider, Brocade spent $2.6bn to expand into IP networking with its landmark purchase of Foundry Networks.) In the report, Robinson taps IBM as a likely buyer for Brocade as a way to gain an immediate presence in the networking space as well as strengthen its lead in the server sector. (Big Blue is one of the largest of Brocade’s OEM partners, which now number 23 companies.)

Hewlett-Packard is a less likely acquirer, in our view, because of the substantial overlap between HP’s newly reinvigorated ProCurve line and Foundry. That said, Brocade is a key supplier of datacenter infrastructure technology, so it is likely to be of interest to sever vendors like HP. Brocade’s appeal might be even sharper now that HP and Cisco Systems, which were once chummy, have found themselves on opposing sides in their efforts to equip the modern datacenters.

One additional buyer that certainly makes sense for Brocade, even more so because of a recently strengthened OEM arrangement, is Dell. The hardware provider, which has already bought its way into storage and other IT infrastructure markets, recently bolstered its OEM arrangement with Brocade to include IP networking and fiber-channel-over-Ethernet gear. (For the record, the WSJ article doesn’t mention Dell as a possible acquirer but, inexplicably, includes Oracle as a suitor. We suspect that Larry Ellison has plenty of other areas of software to consolidate before a hardware-heavy purchase that pits Oracle against Cisco.)

In terms of valuation, we would note that with the M&A-inspired speculative buying, Brocade shares have more than tripled so far this year. (Trading in Brocade stock through mid-Monday was already more than five times heavier than average.) The run has given Brocade an enterprise value (EV) of $4bn, including the jump on Monday. That values it at almost exactly the same level as Cisco on an EV-to-trailing-EBITDA valuation and a slight discount to the networking giant on an EV-to-trailing-sales multiple.

M&A market timing at CA

Contact: Brenon Daly

After a two-year hiatus that ended last fall, CA Inc has returned to the market with newfound enthusiasm. With the vendor’s purchase on Monday of network performance management provider NetQoS, CA has now inked six acquisitions over the past 12 months. That comes after an extended period (September 2006 to October 2008) when the normally acquisitive company stepped out of the market entirely.

During that time, CA’s four large rivals (BMC, Hewlett-Packard, IBM and Symantec) announced a total of 61 transactions between them. Collectively, the quartet of buyers paid roughly 5.7 times trailing 12-month (TTM) revenue in the deals they did. (That’s the median valuation from the more than 20 transactions that either had terms disclosed or where we estimated the numbers.)

So from CA’s perspective, sitting out a period marked by historically high valuations might not be a bad thing at all. Consider this: CA’s purchase of NetQoS cost it $200m in cash, which worked out to 3.6x TTM sales. If we slap the prevailing multiple from the period CA was out of the market (5.7x TTM sales) onto CA’s most-recent deal, the price for NetQoS swells to $320m. Obviously, there were vastly different assumptions about growth rates in late 2006 and early 2007 than there are now, which goes a long way toward explaining the nearly 40% ‘discount’ that CA got by inking the NetQoS purchase on Monday rather than when the market was hot.

Informatica: Just dating or something more?

Contact: Brenon Daly, Krishna Roy

Is it just dating, or are they looking to get married? That was a question that Wall Street was kicking around last week after Hewlett-Packard and Informatica announced a deeper relationship. The new accord sees HP licensing a number of Informatica’s offerings so that it can provide its customers with data management products. HP is also supplying these same wares from Informatica as part of its existing consulting services for business intelligence (BI) and related arenas and pushing these combined offerings through its direct sales force. (My colleague Krishna Roy has a full report on the tie-up.)

The announcement, which came out last Tuesday, didn’t initially generate much speculation about the relationship between the two longtime partners. However, by Friday, Wall Street was reading much more into the joint agreement. Shares of Informatica rallied almost 7% on Friday, with volume more than three times heavier than average. (The rally continued a strong run by Informatica, which has seen its shares gain some 56% so far this year, vastly outpacing the 32% advance for the Nasdaq in 2009.)

However, both HP and Informatica have taken great pains to position themselves as independent software providers. Indeed, even as HP announced that it would be doing more with its relationship with Informatica, it also clearly said that it will continue to work with other data management and BI vendors. And on the other side, we noted that ‘neutrality’ may have come up in rumored talks last year between Informatica and Oracle. In any case, the independence and openness stand in contrast to the moves in this market by IBM – the rival that’s the primary target of the deeper HP-Informatica partnership. Big Blue spent $1.14bn in cash in March 2005 for Ascential Software, an acquisition that most observers would say hasn’t delivered.

Is Riverbed the next Data Domain?

Contact: Brenon Daly

With Data Domain off the market, we did a bit of blue-sky thinking about which company might find itself snapped up in a similar scenario. Our pick? Riverbed Technology. We’re not suggesting that the vendor is in play by any means, but hear us out on this one.

For starters, both Data Domain and Riverbed are fast-growing, single-product companies in markets that are dominated by mature technology vendors that have deep pockets and are hungry for growth. In the case of Data Domain it’s the storage market, while for Riverbed it’s the networking market. (To put some numbers around the differences, consider that Data Domain more than doubled its revenue in 2008, while its acquirer, EMC, saw storage revenue inch up just 10% last year.)

The obvious buyer of Riverbed would be Cisco. That’s so obvious, in fact, that we heard Cisco made at least two overtures to Riverbed before the company went public in September 2006. (However, one source characterized Cisco’s interest more as ‘industrial espionage’ than acquisition negotiations.) So we don’t see Riverbed going to Cisco. Instead, we like Hewlett-Packard as the acquirer of Riverbed.

The two companies have been friendly for years. HP originally had an OEM deal with Riverbed, and later resold the Riverbed product. HP has also integrated the Riverbed Optimization Software into its ProCurve infrastructure. To be clear, we’re not suggesting that there’s anything more than technology talks between the two sides right now. But if HP wanted to bolster ProCurve, picking up Riverbed would do that. Plus, such a deal could help HP stick it to Cisco, which took a swipe at HP earlier this year by jumping into the server market. Maybe HP is interested in countering with a big buy into one of the fastest-growing segments of the networking market.

A (Big) Blue-colored Sun?

Contact: Brenon Daly

Just two days after Cisco took the fight to its longtime allies in the server wars, IBM is now looking to buy some ammunition of its own. Big Blue is reportedly mulling a $6.5bn bid for Sun Microsystems, according to The Wall Street Journal. The deal would be the largest tech transaction (excluding telecom M&A) since Hewlett-Packard jabbed at IBM’s giant services division, paying $13.9bn for EDS last May. If it comes to pass, a pairing of IBM and Sun would also radically change the battle lines in the broader fight to build out datacenters, specifically around server, storage and software offerings.

Take the server market. If the deal goes through, a combined IBM-Sun would dominate the high-end, RISC-based, Unix-based symmetrical multiprocessor server market, leaving HP a distant third. However, one point that might pose a challenge for Big Blue is how long it would want to continue with Sun’s Sparc architecture, a direct clash with its own Power chips and System-p servers. Turning to storage, IBM is probably less excited about Sun’s assets in that market. Sun’s storage business has been languishing in the doldrums for years, despite Sun supporting it with its largest-ever acquisition, its mid-2005 purchase of StorageTek for $4.1bn in cash. Nonetheless, there are probably enough enterprise customers locked into Sun’s high-end, mainframe-centric tape business to interest Big Blue. And in software, IBM and Sun are both committed to open source, although we would add that they have slightly different models for monetizing their investments there.

Of course, there’s a chance that the reported talks may not result in a deal. However, we would note that Sun shares are behaving as if it will go through, soaring nearly 80% in early Wednesday afternoon trading to $8.80. That’s essentially where they were last September. That fact probably won’t be lost on Sun’s largest shareholder, Southeastern Asset Management. The activist investor, which has indicated that it talked with Sun to explore a possible sale of the company, among other steps to ‘maximize shareholder value,’ holds some 20% of Sun stock, according to its most-recent SEC filing.

Inconsistent currencies

Throughout much of the year, the US dollar looked like lightweight paper. A buck basically bought you a loonie (as our northern neighbors call their dollar), and foreign exchange traders were heard shouting jokes about ‘the American peso.’ We noted the weak US dollar as one of the key reasons that total M&A spending by US acquirers dropped by about two-thirds from mid-2007 to mid-2008, while European shopping jumped by one-third (see report).

In the wake of the global financial crisis, however, the dollar has strengthened. To get a sense of that, consider the relative value of the US dollar when two Silicon Valley-based multinational tech giants went on shopping trips to Australia this year. Back when Hewlett-Packard made its play for records management vendor Tower Software in late March, the US dollar bought about A$1.10. A few days ago, when Oracle reached for Haley Limited, $1 bought A$1.60. That’s a lot more buying power for the once-humbled US dollar.