Tag: IBM

IBM-Exeros: the wind-down and the bid-up

Brenon Daly

Contact: Brenon Daly

Even in the ongoing recession, the fundamental economic laws concerning supply and demand still haven’t been overturned. That’s at least one lesson we can draw from the recent sale of the assets of data discovery startup Exeros. Although terms weren’t disclosed, we believe IBM paid about $13m for Exeros. While that hardly seems like a blockbuster exit for a VC-backed startup that raised some $19m, we would note that the price is four times higher than the offer Exeros received from its first bidder.

As we understand the process, SAP offered just $3m for the assets. Exeros gambled and let the ‘no shop’ period expire on SAP’s bid and then successfully enticed IBM. (Big Blue will slot in the Exeros technology alongside a number of other tools in its Information Management portfolio.) One source added that IBM agreed to an earn-out that could take the final price up to $20m, potentially making Exeros’ backers whole on their investment.

Whatever IBM ends up handing over for Exeros, the target should probably consider any amount over SAP’s initial bid a windfall. The last time we spoke with Exeros (in mid-September, just before capitalism as we know it ended), the unprofitable startup said it was looking to raise a third round of funding that would carry it through to break-even status. Of course, we can all imagine how those fundraising conversations must have gone.

So instead of drawing down money, Exeros was wound down. However, the resulting transaction wasn’t like the dozens of scrap sales that we’ve seen in recent months, where a single buyer pushes the price down so low that the startup’s investors get just pennies on the dollar. With both SAP and IBM bidding, Exeros’ backers may well break even. And that’s not a bad return, given what they were facing.

Buying back stock, rather than buying up companies

Brenon Daly

Contact: Brenon Daly

For a risk-averse company like IBM, it’s always preferable to buy a known than an unknown. At least that’s one way to read its decision to pass on taking home Sun Microsystems at any cost and instead put its money toward repurchasing a slug of its own equity. The recently announced $3bn buyback works out to just under half the amount that Big Blue was reported to have been ready to hand over for Sun.

That’s a fundamentally sound – if conservative – allocation of capital for IBM, a dividend-paying member of the Dow Jones Industrial Average. Nonetheless, it didn’t stop Sun’s winning suitor, Oracle, from tweaking Big Blue, saying it only got involved after IBM ‘failed’ to close the deal. For the record, we would note that since the ‘failure,’ IBM shares have moved higher while Oracle stock is essentially flat with where it was when the acquirer announced its bid. Of course, that verdict is based on just three weeks of trading.

IBM isn’t the only firm spending cash on its own shares rather than the equity of other vendors. Citrix, which hasn’t announced an acquisition in more than a half-year, recently said it plans to buy back some $300m of stock. Even when Citrix does do deals these days, they tend to be tiny purchases. Since acquiring XenSource in August 2007, Citrix has made just four small technology plays. We would chalk that up to the fact that Wall Street has been underwhelmed with Citrix’s purchase of XenSource, its largest-ever deal. And that doesn’t appear likely to change. At last week’s Synergy 2009 conference, Citrix barely mentioned M&A.

Preemptive consolidation in financial IT?

-Contact Thomas Rasmussen

With reports indicating that IBM has pulled its multibillion-dollar offer for Sun Microsystems, the second-largest deal of the year so far is the $2.9bn all-equity purchase of Metavante by Fidelity National Information Services (FIS) announced in early April. (Yesterday, Express Scripts announced that it will fork over $4.7bn for WellPoint’s NextRx subsidiaries.) In fact, we recently noted that the first quarter closed without a single transaction worth more than $1bn. It was the first time a quarter passed without a 10-digit deal since we began keeping records in January 2002. This transaction consolidates two active acquirers. Metavante and FIS have together inked more than 30 purchases over the past five years: FIS has completed 18 deals worth north of $7bn (excluding this pickup), while Metavante has closed 15 to the tune of about $1.4bn.

The combined FIS and Metavante will have revenue of $5.1bn, about $300m in cash after the transaction closes, and free cash flow of about $700m. However, though the management of the new company outlined its healthy cash flow as means for making further acquisitions, we don’t expect them to step immediately back into the market as the giants work on integrating the blockbuster deal. (We would note that both FIS and Metavante were out of the market in 2008.) Instead, we expect near-term consolidation to likely come from the firm’s two remaining large competitors Fiserv and First Data Corp, which Kohlberg Kravis Roberts took private for $30bn two years ago. Additionally, we could see Oracle and IBM using their vast cash reserves to buy their way into this sector. In fact, FIS and Metavante said in their conference call discussing their planned transaction that one of the reasons they were getting together was to stave off the expected competition from Oracle and Big Blue. So who might be of interest to any of these buyers? We suspect smaller players such as Jack Henry & Associates or even payments competitors TeleCommunication Systems and S1 Corp could well become targets.

Financial IT M&A by the now three largest buyers since 2002

Acquirer Number of deals Total deal value
FIS-Metavante 42 $12.7bn
First Data Corp 20 $9bn
Fiserv 28 $5.3bn

Source: The 451 M&A KnowledgeBase

IBM-Sun: Nothing but March madness?

Brenon Daly

Contact: Brenon Daly

Maybe the speculation around IBM buying Sun Microsystems was nothing more than a bit of March Madness. When reports surfaced last month that a deal could be in the works, Sun’s long-ailing shares soared from about $5 to nearly $9 in a single session. (At the time, we also looked at what a potential pairing of the tech giants might mean.) And it wasn’t just sporadic trading that powered the mid-March move. More than 160 million Sun shares traded the day after The Wall Street Journal carried its report on initial talks, meaning volume was eight times heavier than average.

It turns out that anybody who bought the stock from then until last Friday is now underwater. (Or to continue our NCAA basketball terminology, they’ve had their bracket busted.) Both the WSJ and The New York Times reported Monday that a deal – even at a lowered price – may be off the table. Sun shares gave up one-quarter of their value in Monday afternoon trading, falling to about $6.50 each. Volume was again several times heavier than average.

Amid all these reports of tough negotiating and ‘recalibrated’ deal terms, we’re reminded of the five-month saga of one public company buying another public company last year. In mid-July, Brocade Communications unveiled a $3bn offer for Foundry Networks, paying nearly all of that in cash and only a tiny slice in equity. As the equity markets plunged last October, the two sides agreed to lower the deal value to $2.6bn by trimming the cash price and removing the equity component. (Brocade shares had been cut in half during the time from the announcement to the readjustment.)

Now, the combined Brocade-Foundry entity, which has existed since mid-December, has a total market capitalization of just $1.5bn. In fact, my colleague Simon Robinson recently speculated that Brocade may be attracting interest from suitors. One of the names that has popped up? IBM, which would get an instant presence in the networking market. And if Big Blue is done with Sun (as reports suggest), then perhaps the company will just shift its M&A focus.

A (Big) Blue-colored Sun?

Brenon Daly

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.

Cutting the ties that bind

Brenon Daly

Contact: Brenon Daly

As the business prospects for this year continue to deteriorate, companies are increasingly looking to shed underperforming divisions. VeriSign, for example, has already divested two units so far this year and still has a handful of others on the block. As drawn-out and money-losing as divestitures can be, it’s almost always preferable to the alternative of actually hanging on to the struggling businesses. At least that’s the view from Wall Street, which rarely dings a company for pruning.

We’ve been thinking about this in recent weeks as we’ve seen the projections for PC sales in 2009 get pulled back again and again. The bearish outlook has caused most PC makers to overhaul their strategies for selling boxes. For instance, Lenovo has scaled back its expectations for selling PCs in Europe and North America, and will instead focus on its home Chinese market, particularly the rural sector. The shift essentially undercuts the need for IBM’s PC business, which Lenovo picked up four years ago. (IBM took payment for the divestiture in cash and stock, booking a pre-tax gain of about $1bn.)

Of course, it’s hard to know how that division would have fared if Big Blue hadn’t shed it. And, it’s virtually impossible to calculate how much of a drag PCs, which accounted for about 10% of IBM’s sales, would have been on the overall company’s performance. But consider this: Since IBM closed the divestiture in mid-2005, Dell shares, which stand as the closest proxy to the PC industry, have lost 75% of their value and are trading at their lowest level since 1997.

The saga of Certicom’s sale

Brenon Daly

Contact:  Brenon Daly

After more than two months of bid and counterbid, the saga of the sale of Certicom appears to be nearing its close. In early December, fellow Canadian tech company Research in Motion tossed out a low-ball bid of $1.21 for each of the 43.7 million shares of Certicom. Overall, that valued the cryptography vendor at some $53m. We should hasten to add that RIM’s offer was unsolicited.

Certicom, along with adviser TD Securities, mulled over the offer for about three weeks before saying ‘thanks but no thanks’ to RIM. Undeterred, RIM kept its bid alive for the next month, before officially pulling it January 20. Three days after that, VeriSign stepped in with an offer of $1.67 for each Certicom share, or a total of $73m.

Just last week, RIM reentered the picture with a bid of $2.44 per share, or about $106m. (Viewed another way, RIM’s new offer values Certicom at exactly twice the level as its initial bid.) As part of the terms, VeriSign now has until Wednesday to up its offer or see Certicom go to RIM. (The deal carries a $4m breakup fee.)

Of course, there could always be a third suitor in the picture. If we had to pick one likely candidate, we might tap IBM. Last April, Big Blue inked a ‘multiyear, multimillion-dollar’ license agreement with Certicom, and has already handed over a $2m upfront payment.

Hey, big spender?

Brenon Daly

Contact: Brenon Daly

Given all the economic uncertainty, companies have made it clear that they’re not in the market for any big deals. (In our annual survey of corporate development officials, they indicated that they were least likely to pursue ‘transformative’ deals in 2009.) To put some numbers around that sentiment, we contrasted the shopping tab of four well-known tech companies in 2008 with the previous year’s tally.

The quartet we selected (IBM, SAP, Microsoft and Nokia) all announced the largest deals in their respective histories in 2007 so we naturally expected some drop-off in spending. But we were amazed at the steepness of the plunge. In 2007, the four companies announced 40 transactions with an aggregate value of $29.2bn. Last year, that dropped to 34 deals worth a paltry $4.7bn. (In fact, each of the firms inked a single transaction in 2007 that was worth more than 2008’s collective total.) And it’s not like they don’t have the resources to continue shopping. Over the past four quarters, IBM, SAP, Microsoft and Nokia have collectively generated an astounding $45bn in cash-flow operations.

Net effect from Intel’s buy

-by Thomas Rasmussen

It’s a somber 10-year anniversary for 10-Gigabit Ethernet vendor NetEffect. The company was picked up by Intel in a bankruptcy asset sale last week for a bargain $8m. Its technology, along with 30 of its engineers, will be rolled into Intel’s LAN Access Division. NetEffect has burned through some $50m in funding since recapitalizing in 2004. The company, which we once heralded as an innovator and potential leader in 10GigE technology, simply ran out of cash.

One reason for NetEffect’s scrap sale might be the increased competition. Big players like Intel, with its own organic offerings and its tuck-in of NetEffect, and Broadcom, with its $77m acquisition of Siliquent Technologies in 2005, have been crowding an already teeming market. This, coupled with scarce funding and lack of widespread adoption of the technology, makes us wonder what will happen to NetEffect’s surviving former rival startups still trying to stay afloat.

Venture capitalists have thrown hundreds of millions of dollars at 10GigE companies, with little to no payoff. We suspect the wind-down of NetEffect is an indication that VCs have had enough. Tehuti Networks, iVivity, Myricom, Neterion Technologies and Alacritech are some of the many startups in this sector that could potentially feel the net effect from this. In fact, iVivity seems to have quietly hit the switch already; its website is down and its phones are off the hook. Firms that will benefit from this include IBM, Hewlett-Packard, Dell and Hitachi, which are likely to follow Intel’s lead and peruse the bargain bin.

Known funding of select 10GigE players

Company Total funding Last round Status
Chelsio Communications $100m $25m series E (2008) Active
iVivity $60m $10m series D (2006) Missing in action
NetEffect $47m $25m series B (2006) Acquired by Intel for $8m
Siliquent Technologies $40m $21m (2004) Acquired by Broadcom in 2005 for $77m
Silverback Systems $51m $16m series D (2006) Acquired by Brocade Communications in 2007 for less than $10m*
Tehuti Networks Unknown Series B (2008) Active

Source: The 451 M&A KnowledgeBase *Official 451 Group estimate

Citrix sits out

Brenon Daly

Since announcing its landmark acquisition of XenSource a little more than a year ago, Citrix has largely taken itself out of the M&A market. And don’t expect that to change anytime soon. CFO David Henshall told the Deutsche Bank Technology Conference earlier this week that the company ‘has its hands full’ with working out its virtualization strategy, which it grandly refers to as a datacenter-to-desktop offering. (That strategy largely reflects the fact that VMware, with an estimated 85% of the server virtualization market, isn’t as vulnerable as Citrix initially thought, at least around ESX.)

While Citrix has inked three deals since XenSource, the acquisitions have been quiet technology purchases. For instance, in January Citrix snagged a product line from FullArmor, a self-funded business process orchestration tool vendor, and in May it added Sepago, a 30-person company that only launched a product a year ago after a few years as a consulting shop.

Instead of spending on M&A, Citrix’s Henshall indicated that the company will continue to put much of the cash it generates ($75-100m each quarter) toward buybacks. If nothing else, Citrix has been getting a relative bargain in the buyback. After two straight earnings warnings earlier this summer, shares sank to their lowest level in almost three years. Around that same time, perhaps not coincidentally, rumors began to surface that Cisco or IBM might be shopping Citrix. If Citrix does get acquired, we still think the deal will flow through Redmond, with Microsoft to reach for its longtime partner to shore up its own virtualization offering.

Citrix deal flow

Year Deal volume Deal value
2008 2 Not disclosed
2007 5 $500m
2006 3 $117m
2005 2 $338m

Source: The 451 M&A KnowledgeBase