Contact: Brenon Daly
In a highly unusual twist of timing, both IBM and McAfee announced significant acquisitions of security event and incident management (SIEM) startups within hours of each other Tuesday morning. First up, IBM said it was adding Q1 Labs as part of a new initiative around ‘Security Intelligence.’ (The announcement confirmed the rumored pairing between the two companies that we noted on Monday.) That was followed just two hours later by McAfee’s reach for NitroSecurity.
The transactions, which are both expected to close before the end of the year, take the two largest privately held SIEM vendors off the market. According to our estimates, Q1 was tracking to about $70m in sales this year while NitroSecurity was likely to generate roughly $30m. Between them, the two startups counted more than 2,300 customers. Further, Q1 and NitroSecurity were the highest-ranked private SIEM providers in a recent survey of IT buyers by TheInfoPro, a division of The 451 Group.
All of that goes a long way toward explaining why both startups got valuations substantially above prevailing market multiples. Collectively, Q1 and NitroSecurity took in a total of about $75m in funding over the decade or so they had been in business. As we understand it, the aggregate price for the pair is somewhere in the neighborhood of 10 times the amount they raised.
Contact: Brenon Daly
After nearly two decades in some form or another as a public company, McAfee all but certainly reported its quarterly results to Wall Street for the final time on Tuesday morning. The company’s sale to Intel is expected to close in the coming weeks, a deal that will bring the largest stand-alone security vendor under the ownership of the largest semiconductor maker. For 2010, McAfee reported sales of $2.1bn and cash from operations of $595m. It didn’t hold a conference call because of the imminent close of its sale to Intel. (We suspect that the company won’t miss that quarterly ritual.)
The unexpected acquisition, which received our Golden Tombstone award as the most significant transaction of last year, was supposed to have already closed. When the $7.7bn deal was announced in mid-August, the companies indicated that they expected it to close before the end of 2010. It got overwhelming clearance from McAfee’s shareholders in early November, with 1,500 ‘yes’ votes for every one ‘no’ vote. US regulators signed off on the transaction in December.
But it took another month for European regulatory authorities to give their blessing – and they did so only conditionally. Among other things, Intel had to assure the European Commission that it won’t prevent other security providers from working on its chips and that the vendors will be able to use ‘functionalities’ of Intel’s products in the same way that McAfee is able to. While Intel may not be thrilled about making concessions to the EC, at least the six-month-old deal isn’t getting bogged down there. Remember that it took Oracle some nine months to close its purchase of Sun Microsystems, largely because of European regulatory concerns.
Contact: Brenon Daly
In addition to asking corporate development executives in our annual survey to look ahead and predict M&A activity and valuations in the coming year, we also asked them to look back and tell us which deal of the previous year they thought was the most significant. The winner for 2010? Intel’s $7.7bn purchase of McAfee, an unexpected transaction that landed the largest stand-alone security company inside the dominant supplier of microprocessors. At nearly twice the value of the previous largest security deal, it’s a risky bet that security will become another integral consideration around silicon, along with power consumption and performance.
The landmark Intel-McAfee pairing barely edged out Hewlett-Packard’s contested acquisition of high-end storage vendor 3PAR in the voting by corporate development executives for the Golden Tombstone for the top deal of the year. Past winners of the highly coveted award include Oracle-Sun Microsystems (2009), HP-EDS (2008) and Citrix-XenSource (2007).
We suspect that the competition for next year’s Golden Tombstone may be even more intense, at least according to one indication in our survey. (See our full report on the survey.) When we asked corporate development executives about how likely they were to do ‘transformative acquisitions,’ more than half (52%) said they planned to do one of these risky, bet-the-company kind of transactions. In our 2009 survey, just one out of five respondents said that.
Contact: Brenon Daly
Symantec gives its latest quarterly update on business after the closing bell Wednesday, with Wall Street wondering if the company will ever emerge from its ‘Veritas hangover.’ The storage business, which Symantec picked up in its $13.5bn purchase of Veritas in late 2004, has long weighed on Big Yellow’s overall performance. The division posted the sharpest revenue decline at Symantec’s three business units in the previous fiscal year, and was the only one that shrank again in the first fiscal quarter. The storage business will likely shrink again in the just-completed second fiscal quarter.
None of that, of course, is new. In fact, more than two years ago, we noted how Symantec was busy knocking rumors about unwinding any of the underperforming Veritas assets. But ever since rival McAfee sold to Intel, the paltry valuation of Symantec has come into sharp relief. Consider this: Symantec generates three times the sales of McAfee ($6bn vs. $2bn) but garners less than twice McAfee’s valuation (current market cap of $12.5bn vs. McAfee’s $7.7bn equity value in its sale to Intel).
Perhaps that valuation discrepancy alone accounts for the market buzz we’ve heard recently that Symantec may be (once again) considering shedding Veritas. That move has been looked at a number of different times, in a number of different ways, over the years.
Most recently, we heard a variation on it that had the storage business going to EMC in return for the RSA division and some cash. Another rumor had the business landing at a buyout shop. (Although shrinking, the storage business is still Symantec’s largest unit, and runs at the highest margin in the company. It generates more than $1bn in operating income.) Whatever the destination, it may well be time for Symantec to acknowledge that its grand experiment of a combination of storing and securing information hasn’t gone according to plans. Wall Street has certainly given that verdict, having clipped Symantec shares in half since the Veritas deal was announced.
Contact: Brenon Daly
In both of the largest enterprise IT acquisitions so far this year, the deals are not what they seem. Or more accurately, the target companies were not acquired for what they are. What do we mean? Well, we would posit that Intel didn’t buy McAfee for its core security applications any more than SAP scooped up Sybase for its core database product. Instead, in each case, the buyers really only wanted a small part of the business but found themselves nonetheless writing multibillion-dollar checks for a whole company.
For SAP, the apps giant really wanted Sybase’s mobile technology, essentially using the Sybase Unwired Platform to ‘mobilize’ all of its offerings. It’s nice that the purchase also brought along some data-management capabilities, particularly some pretty slick in-memory database technology. But for SAP, this deal was all about getting its apps onto mobile devices. However, Sybase’s mobile business only generated about one-third of total revenue at the company. So SAP ends up handing over $5.8bn in cash for a business that’s currently running at just $400m.
If anything, Intel is paying even more for the business that it truly wanted – or, at least, the business that’s most relevant – at McAfee: embedded security. Yet that’s only a small (undisclosed) portion of the roughly $2bn revenue at McAfee, the largest stand-alone security vendor. Tellingly, Intel plans to operate as a kind of holding company, letting McAfee continue undisturbed with its business of selling security applications to businesses and consumers.
Contact: Brenon Daly
The largest stand-alone security company is no longer standing on its own. McAfee agreed Thursday to a $7.7bn all-cash offer from Intel. The bid of $48 for each share represents a 60% premium over the security vendor’s previous closing price – and the highest price for its shares since early 1999. Intel’s purchase represents a significant gamble that security can be hardened by pairing software with hardware, which will likely be even more important as the need for security expands from just computers to consumer electronics, datacenter equipment and other devices. Despite that rationale, Intel still struck most observers as a surprise buyer for McAfee, which had been linked in earlier rumors to Hewlett-Packard.
The deal stands as the largest security acquisition ever, nearly twice the size of the number two deal, Juniper Networks’ $4bn purchase of NetScreen Technologies in early 2004. (Juniper used equity to cover that transaction; its stock is currently at the same price it was when it announced that deal.) Interestingly, the banks on both of these mammoth security transactions were the same: Goldman Sachs had both sole buy-side mandates (for Juniper and, more recently, Intel) while Morgan Stanley worked the sell side (sole advisor for McAfee and co-advisor, along with JP Morgan Securities, on NetScreen).
Recent significant security transactions
|August 19, 2010
|February 9, 2004
|June 29, 2006
|August 23, 2006
||Internet Security Systems
Source: The 451 M&A KnowledgeBase
Contact: Brenon Daly, Jay Lyman
It was hardly surprising when embedded OS vendor MontaVista Software got snapped up earlier this week. In fact, my colleague Jay Lyman put MontaVista at the top of his hit list for targets in the market in his report back in August. After all, the company was a pioneer of the embedded space and was a clear leader among startups chasing this opportunity. MontaVista was running at about $30m in sales, and we understand that the vendor was targeting $40m and a few million dollars in profit in 2010. What did surprise some observers (including us, to some extent) was the buyer: Cavium Networks. Cavium will pay $50m ($16m in cash, $34m in equity) for MontaVista.
Along with much of the market, we expected IBM to reach for MontaVista as a way to match Intel’s acquisition of Wind River in June. Wind River stands as the giant in the embedded OS sector with revenue about 10 times higher than MontaVista. In a rather uncharacteristic transaction for Intel, the chipmaker paid $884m for Wind River. Several sources indicated that Big Blue, which was a heavy user of Wind River software for its embedded Power chip business, was the cover bidder for the company. Whether or not that’s the case, we understand that IBM’s interest in MontaVista was fitful and ultimately hinged on Big Blue being able to cobble together a coalition of other processor providers. As that effort dragged on, we understand that Cavium moved quickly and wrapped up the deal in about a month.
Contact: John Abbott
Despite a fair bit of talk about how important it is to demystify the art of parallel programming now that multiple cores and threads have become mainstream in x86 computing platforms, the actual level of activity has been surprisingly low. Over the last few years we’ve identified no more than a dozen small development tools vendors active in this area – some of them focused on the high-performance computing (HPC) sector – that appeared to have some prospect of success. And the companies with the most at stake in seeing better performance levels from new-generation CPUs (notably Intel and Microsoft) don’t seem to have been working particularly hard on the problem, either.
Perhaps, however, that’s starting to change. True, the number of startups is declining rather than expanding, but as they fail their assets are being acquired by larger vendors. One of the first to go was PeakStream in June 2007, snagged by Google after raising $22m in VC funding. But Google had no interest in sharing what it had bought. It withdrew PeakStream’s commercial product and began using it internally to boost the performance of its own software. Just last month Intel – currently in the process or rolling out six- and eight-core microprocessors – revealed that it had quietly picked up two small companies: RapidMind and Cilk Arts. And now Microsoft has announced, equally quietly, that it has purchased the technology assets of Interactive Supercomputing (ISC).
ISC had raised around $18m in VC funding over its four years of life, from Ascent Venture Partners, CommonAngels, Flagship Ventures, Fletcher Spaght and Rock Maple Ventures. It’s perhaps a bit of a stretch to call what ISC was doing mainstream, since it was focused on the HPC market. Its Star-P development environment let users create software models on their desktops using off-the-shelf packages from which parallel code could be automatically generated. The company claimed it could cut months from software development lifecycles. But Microsoft is talking about integrating ISC’s technology into its own products and using it for desktop computing as well as clusters. ISC CEO Bill Rock will bring over a team of experts to join Microsoft’s New England Research & Development Center in Cambridge, Massachusetts. Microsoft says it will continue to support existing Star-P users but won’t continue to sell the product in its current form.
by Brenon Daly
Looking at Intuit’s acquisition of PayCycle Inc, we might note that the alumni network can pay off – and pay off big. Intuit picked up the payroll services startup earlier this week for $170m in cash. We understand that PayCycle generated only about $30m over the previous four quarters, meaning Intuit paid an estimated 5.7x sales. (Granted, by looking solely at revenue, we’re arguably shortchanging PayCycle. The company, which has some 85,000 customers, sells its payroll services on a subscription basis, meaning revenue substantially lags actual contracts it has billed.) In a somewhat unusual mandate, Goldman Sachs advised Intuit, while Lane, Berry & Co., now owned by Raymond James & Associates, advised PayCycle.
There are a number of connections between Intuit and PayCycle. The Palo Alto, California-based startup was founded by a pair of former Intuit executives (Martin Gates and Rene Lacerte) who then turned the company over to Jim Heeger, Intuit’s former chief financial officer. Also, board member David Hornik of August Capital formerly drew a paycheck from Intuit, as did fellow investor Tom Blaisdell of DCM.
Contact: Brenon Daly
Qualcomm’s recent pickup of graphics and multimedia assets cast off by Advanced Micro Devices continued a trend toward divestitures by major technology companies. Nokia, Verisign, Rackable Systems and Symantec, among others, all sold parts of their business in 2008. And, more specific to the chip industry, AMD’s rival Intel has done more selling than buying over the past three years. (For the record, AMD sold technology to Qualcomm that the wireless company had licensed for several years. Qualcomm will hand over $65m for the unit.)
We expect that more companies will look to sell off segments in 2009, as Wall Street increases the pressure on them to focus on their core business. (We have noted in the past that Symantec, which will have a change at the chief executive spot in April, is a prime candidate for further divestitures.) In 2008, spending on divested business units accounted for some 11% of all M&A activity. That’s up from just 7% in 2007. We wouldn’t be surprised at all to see divestiture spending remain in the double digits in 2009.