Contact: Brenon Daly
Looking back on dealmaking in 2010, it strikes us that it wasn’t the year that it could have been. With the recession (officially) behind us and many tech companies’ stock prices and cash hoards hitting record levels, we might have thought M&A last year would rebound to pre-Credit Crisis levels. That wasn’t the case.
In 2010, we tallied some 3,200 transactions – a slight 7% increase over the number of deals in the recession-wracked years of 2008 and 2009. In the far more important measure of tech M&A spending, the $178bn in 2010 represented a substantial 21% jump from 2009 levels. But it’s just half the annual amount we saw from 2005-2008. (In fact, the spending in the second quarter of 2007 alone eclipsed the full-year total for 2010.)
Looking deeper at last year’s activity of some of the key tech corporate buyers, we begin to see a partial reason for the muted overall spending, at least compared to pre-Crisis years. Yes, stalwarts like IBM and Hewlett-Packard continued their shopping sprees in 2010. Collectively, that pair announced 23 transactions worth a total of $11.1bn. But other tech bellwethers weren’t so quick to sign deals last year.
Microsoft announced just two purchases in 2010. Symantec sat out the entire second half of 2010 – a period, we might note, that saw its largest rival, McAfee, get snapped up. Cisco Systems did fewer deals in 2010 than in 2009. Included in the list of 2009 transactions for the networking giant were a pair of $3bn acquisitions (Starent Networks and Tandberg), while the largest deal Cisco announced last year was the $99m pickup of CoreOptics.
And although Dell was in the news often for M&A last year, both on successful and unsuccessful transactions, its overall activity basically kept pace with recent years. However, the company’s landmark purchase of 2010 (the $960m acquisition of Compellent Technologies) only ranks as the third-largest deal Dell has made since it jump-started its M&A program in mid-2007.
Contact: Brenon Daly
Announcing its first major acquisition since it was spun off into a stand-alone company more than three years ago, Teradata said it will pay $525m in cash for Aprimo. The deal marks a significant bet by the data-warehousing giant on the application market. Specifically, Aprimo brings a marketing automation offering to run on top of Teradata’s existing business analytics offering. Aprimo products will continue to be marketed and sold under the company’s name once the transaction closes, which is expected in the first quarter.
According to a conference call discussing the acquisition, Aprimo is expected to generate about $80m in annual sales. (We understand that roughly $60m of that is recurring revenue.) That means Teradata is paying a healthy 6.5 times revenue for Aprimo. That’s slightly ahead of the valuation that IBM paid in its big marketing automation play four months ago. Big Blue handed over $523m in cash for Unica, valuing the publicly traded company at 4.8 times trailing revenue.
Part of Aprimo’s premium could likely be attributed to the fact that it was steadily moving its business from a license model to a subscription basis. In fact, Aprimo’s SaaS offering accounted for a majority of its revenue. IBM’s move was important in the Aprimo process, as we gather that Teradata and Aprimo started talking only after Big Blue had closed its acquisition.
Contact: Brenon Daly
Shortly after IBM bagged Netezza, we noted that Big Blue had been doing some big-game hunting in recent deals. It turns out that’s also true when it takes aim at private companies. In fact, we estimate IBM has spent more on startups than it has on the public companies it has taken home over the past year.
First, we should qualify a bit of our math. In the past 12 months, Big Blue has announced 17 acquisitions. Included in that flurry of dealmaking is the purchase of a pair of public companies (Unica and Netezza), the pickup of a billion-dollar carve-out (the Sterling Commerce business from AT&T) and the acquisition of 14 privately held companies. IBM has not disclosed a single price for any of the more than dozen private companies it has snared since last October, even though some of them are costing the company – that is to say, its shareholders – several hundred million dollars a pop.
Nonetheless, we have estimates of the price tags of nine of the 14 deals. (These estimates have all been corroborated by at least two sources familiar with the transactions.) According to our estimates, more than half of the acquisitions (five of nine) cost IBM more than $200m each. Altogether, we estimate the nine deals set Big Blue back $2bn. That incomplete bill for the private company purchases is only slightly less than the $2.3bn that IBM disclosed it is spending on Unica and Netezza.
Contact: Ben Kolada, Brenon Daly
For businesses that both had ‘scale’ in their name, neither MaxiScale nor ParaScale got very big. Nor did they get very big exits in their recent sales. In the crowded cloud storage market – dominated by multibillion-dollar incumbents IBM, EMC and HP – startups have only a short time to prove themselves to potential customers. We suspect that both MaxiScale and ParaScale shared similar fates because VCs are becoming quicker to pull the plug on storage investments that aren’t lining up customers.
That’s particularly true for MaxiScale, which we covered a year ago as it emerged from stealth. While ParaScale chalked up some customer wins, rumors have it that MaxiScale was unable to actually generate any revenue from its product. The bleak outlook forced the company to sell its assets last week to Overland Storage at what we expect was a fraction of the $25m that investors poured into the firm. We doubt that Overland paid much more than $5m for the acquired MaxiScale assets.
However, not all cloud storage startups are landing on the scrap heap. While MaxiScale and ParaScale were unable to secure lifeline funding, rival Caringo raised a fresh $5m round in July. In the past year, the company claims to have increased its customer count from 150 to more than 400, and is set on reaching profitability by the first half of next year. We don’t consider the firm an acquisition target just yet, but if it continues to do well, it could draw some interest down the road.
Contact: Brenon Daly, Dennis Callaghan, Krishna Roy
A little more than a year after scrapping its OEM agreement with master data management (MDM) vendor Orchestra Networks, Software AG has picked up its own MDM and data-governance technology. The German company recently reached across the Atlantic for Data Foundations, which we gather was a small purchase of a startup generating less than $10m in sales. Nevertheless, the deal continues the recent consolidation in the MDM market, which has seen fellow big-name buyers such as IBM, Informatica and TIBCO Software make acquisitions here.
A bit of a wonky area of information management, MDM has increasingly become a complementary tool for application integration and business process management software as it helps to make sense of the many different data types that underpin these applications. Further, other rival players have taken a platform-based approach to MDM, combining data-integration and data-quality capabilities into the MDM mix.
We wonder if Software AG will follow suit and enter the MDM platform fray by pairing the Data Foundations buy with another MDM-related purchase. If it looks to do that, we wouldn’t at all be surprised to see Software AG add a data-quality provider to its portfolio. A few names that might be worth a look for the acquisitive German company are Datanomic, DataLever, DataMentors, Datactics, Clavis Technology and Human Inference.
Contact: Brenon Daly
With the news today that Hewlett-Packard is closing its recent pickup of Fortify Software, we wanted to take the opportunity to point out that the deal almost belongs in the minority of M&A moves HP has made so far this year. What are we talking about? Basically, that the tech giant has been doing giant deals. Of the seven acquisitions HP has announced so far in 2010, fully three of them have been valued at more than $1bn.
We noted in mid-April, which is before it inked any of its three 10-digit acquisitions, that HP had telegraphed to the market that it was going to do fewer transactions, but they were going to be bigger deals. (And we should add that its purchase of application security vendor Fortify wasn’t just a pocket-change deal. We understand that it paid $275m or so for the company.)
What’s interesting to note is that in the five months since we indicated that HP would be big-game hunting, one other company has joined it on safari: IBM. Big Blue has inked a pair of deals valued at more than $1bn since April – the pickup of AT&T’s Sterling Commerce business as well as Monday’s purchase of Netezza. Along the way, it has also done a steady flow of transactions valued at $150m-500.
Altogether, we calculate the tab for Big Blue’s five-month shopping spree at roughly $4.8bn for its nine acquisitions. (Incidentally, the amount of cash it spent is basically the same amount its business generated over that same period.) Meanwhile, HP spent about $1bn more ($5.8bn in disclosed or estimated deal values) on its seven purchases since mid-April. Taken together, these two companies have averaged about $2bn of M&A spending in each of the past five months. And they were sniping at each other about ‘buying’ R&D? Really?
M&A activity since mid-April 2010
||Number of acquisitions
||Total M&A spending
Source: The 451 M&A KnowledgeBase *Includes disclosed and estimated deal values
Contact: Brenon Daly
Perhaps Mark Hurd feels vindicated. No, we’re not referring to the former Hewlett-Packard chief executive settling a lawsuit with his old shop. Instead, we’re talking about IBM’s stunning flip-flop with regard to high-profile M&A by itself and rival HP. At the least, Big Blue’s recent comments now appear inconsistent; at the worst, they smack of hypocrisy.
The specifics: A week ago, Big Blue’s CEO was blasting HP for ‘overpaying’ for deals, and for relying on M&A rather than R&D. Ironically, Sam Palmisano made these comments just as his own company was putting the final touches on its acquisition of Netezza, a deal that values the data-warehousing vendor at nearly 7 times this year’s forecasted sales for the current fiscal year. That’s more than twice the median software valuation, and basically matches the valuation that HP is handing over for ArcSight.
Incidentally, both transactions valued the targets, which had only come public within the past three years, at their highest-ever valuations. But if we look at how the shares of ArcSight and Netezza have performed so far this year, it becomes very clear that IBM was the much more aggressive suitor. Excluding the pop ArcSight shares got when word of a deal leaked in late August, the security vendor’s stock had only ticked up about 10%. In contrast, Netezza stock had run 150% from January to the day before Big Blue announced its purchase.
Contact: Brenon Daly
A little more than three years after Netezza debuted on the NYSE, the data-warehousing vendor is being erased from the Big Board at basically twice its valuation at the time of its IPO. Under terms, IBM is handing over $27 in cash for each share of Netezza, which went public at $12 in July 2007. However, after the strong debut, which valued the company at around $1bn, gravity set in on Netezza shares. They spent most of 2008 and all of 2009 under the $12 offer price.
Earlier this summer, however, Netezza shares started running. The run was fueled by strong second-quarter results that saw total revenue surge 45%, as well as lingering M&A rumors. (We noted in early July that we had heard EMC was interested in Netezza before it opted for rival data-warehousing vendor Greenplum. IBM’s bid values Netezza at twice the level it was trading at the time.)
As Netezza shares continued climbing to new highs on the market, the move whittled away the premium Big Blue is offering. Compared to the previous day’s close, IBM is paying just a 10% premium for Netezza. But judged against where Netezza was trading a month ago, the premium is 80%. We would add that Netezza shares have traded above the $27 bid since the open Monday morning. UBS advised IBM, while Qatalyst Partners advised Netezza.
Based on the enterprise value of $1.7bn given by IBM, the offer values Netezza at 8.9 times sales in its fiscal year that ended in January. (As a trading comparison, Teradata currently garners a valuation that’s about one-third that level.) At the end of its second quarter, Netezza guided Wall Street to expect about $250m in sales for the current fiscal year, meaning IBM is paying 6.8x projected sales. While that is a relatively rich valuation, it’s much lower than rival EMC paid in its big data-warehousing purchase. We understand that it handed over $400m for Greenplum, which was running at about $30m in sales.
Contact: Brenon Daly
In the startup world, a restart rarely goes anywhere. What typically happens is a company swaps one failing business plan for another, with the inevitable wind-down delayed only by a fresh round of capital. Yet that’s not the case with OpenPages, which secured a solid exit with its sale to IBM after completely overhauling its business.
OpenPages, which sells software for the governance, risk and compliance (GRC) market, has virtually nothing in common with the company that started out in 1996. As its name implies, OpenPages was originally a content management vendor. The firm survived the dot-com bust, but only after trimming its headcount from more than 300 down to 15. In the aftermath, it also switched to Plan B for the business: GRC.
Although the initial draw to the GRC space was Sarbanes-Oxley, OpenPages found success in the broader market. By 2006, Sarbanes-Oxley only accounted for about 15% of revenue at the firm. As it recast its business, OpenPages also recapitalized the business. It raised some $10m in 2004 and added another $10m in 2007. (Back in the Bubble Era, it had raised about $60m from investors.)
The sale to IBM makes a fair amount of sense, both strategically and financially. Big Blue and OpenPages have been partners for at least three years. In addition to OpenPages’ technology fitting well with the BI portfolio IBM acquired with Cognos, there’s also a large chunk of services revenue that Big Blue can pocket around an OpenPages implementation. (OpenPages has some 140 customers.)
And, at least as we understand the deal, the exit valued OpenPages at a healthy 5 times its estimated $35m in sales. (Both the price and the valuation line up almost exactly with the other large GRC deal of the year, EMC’s purchase of Archer Technologies back in January.) In our view, whatever valuation OpenPages got should probably be viewed as a rich one when we consider the fact that the company nearly died penniless earlier in its life.
Contact: Brenon Daly
If IBM and Hewlett-Packard basically matched each other’s deal size in the first round of M&A for application security, HP has gone much bigger than Big Blue in the second round. In fact, we gather that the price tag for HP’s recent purchase of Fortify Software is more than 10 times larger than the amount IBM paid last summer for rival static code analysis vendor Ounce Labs. (When IBM announced the deal, we speculated that HP may well work out its own tit-for-tat deal, reaching for its partner Fortify.)
Terms weren’t revealed on either the Fortify or Ounce Lab transactions. However, we gather that IBM picked up Ounce Labs for about $25m and that HP likely paid about $275m (including an earnout) for Fortify. Our understanding is that Ounce Labs garnered roughly 3 times trailing sales, while Fortify went for about 4.6x trailing sales of about $60m.
Those deals, which were separated by roughly a year, came after both tech giants had made acquisitions of dynamic code analysis vendors within two weeks of one another. Back in mid-2007, IBM purchased Watchfire for an estimated $140m, roughly matching HP’s $135m acquisition of SPI Dynamics. Both transactions were done at more than 5x trailing sales, according to our understanding. For those keeping track of the arms race M&A by these two tech superpowers, the collective bill for their application security purchases now exceeds a half-billion dollars.
Select application security acquisitions
||Target trailing revenue
|August 17, 2010
|July 28, 2009
|June 19, 2007
|June 6, 2007
Source: The 451 M&A KnowledgeBase *451 Group estimate