The ‘state of the union’ for tech unions

Contact: Brenon Daly

To get a sense of what we might see in tech M&A in 2012, we looked back on the previous year to highlight some of the trends and marquee transactions that we expect to continue to shape the market. In our annual ‘state of the union’ report, we noted that both the number of IT, telecom and Internet deals as well as the spending on them last year posted a mid-teen percentage increase over 2010.

And while the gain may seem pretty straightforward, getting there was rather erratic. We saw spending hit its highest level in August, but then get dragged down to anemic levels in the following months amid concerns about European debt levels. Spending on deals in Q4 actually declined from 2010 – the only quarter last year to do so. Still, we see a number of drivers, which we highlight in our report, that should keep dealmakers busy over the coming year.

Overall tech M&A activity

Year Total volume Total value
2011 3,696 $219bn
2010 3,261 $187bn
2009 3,026 $147bn
2008 3,014 $301bn
2007 3,640 $432bn
2006 4,029 $457bn
2005 3,040 $373bn
2004 2,081 $226bn
2003 1,508 $62bn
2002 1,921 $83bn

Source: The 451 M&A KnowledgeBase

Chip M&A headed for slowdown

-by Thejeswi Venkatesh, Ben Kolada

So far, 2011 has been a banner year for semiconductor M&A – the first three quarters have already yielded the highest aggregate spending on chip deals since 2006. But now, the industry seems to be headed for a slowdown.

Industry veteran Fairchild Semiconductor recently reported third-quarter revenue of just over $400m, better than expected but still down 7% sequentially and 3% from the year-ago period. Continuing the decline, the company provided a bleak outlook for the fourth quarter, citing weak demand in the end markets that it serves – particularly the computing and consumer sectors. And the drop-off shouldn’t be taken lightly, considering demand typically picks up in the fourth quarter due to the holiday season and increased consumer spending.

Coinciding with Fairchild and the greater semiconductor industry’s slowdown, dealmaking has also taken a nosedive. The aggregate value of all semiconductor transactions in the just-closed third quarter was $6bn, the lowest this year, and Broadcom’s $3.9bn acquisition of NetLogic Microsystems alone accounted for more than half of that amount. Further, volume slid as well, with only 32 deals announced in Q3, one-third less than the total volume announced in the first two quarters of the year.

Semiconductor M&A activity, 2011

Quarter Deal volume Deal value Number of deals valued at $1bn or more
Q3 32 $6.17bn 1
Q2 45 $16.49bn 3
Q1 43 $8.34bn 2

Source: The 451 M&A KnowledgeBase

Tech M&A spending hits post-recession high

Contact: Brenon Daly

Lifted by AT&T’s massive consolidation play, tech M&A spending in the just-closed first quarter hit a post-recession record of $84bn – one-third more than the previous high-water mark of $62bn set in Q2 2010. Additionally, the number of transactions in the just-completed first quarter (881) also set a new record. (See our full report on the first-quarter activity.)

And yet even without the landmark telecom deal, Q1 deal flow was surprisingly strong, particularly in March. Excluding AT&T’s planned purchase of T-Mobile USA, the quarterly spending total was higher than both the preceding Q4 2010 and the year-earlier Q1 2010. Most of that, however, was due to a flurry of activity in March, which saw spending at more than twice the monthly rate of the previous half-year and the highest level since last summer. (Again, that’s backing out the $39bn that AT&T is set to spend on T-Mobile USA, a deal that was announced on March 21.)

As the gigantic telecom transaction illustrates, M&A is an inherently lumpy business. So projecting annual totals from a single quarter’s activity doesn’t necessarily make for a reliable forecast. Nonetheless, we would note that the frenetic start to 2011 puts it on track for nearly $340bn in spending for the year. If it comes in at roughly that level, it would mark the highest annual spending total in four years and would not be too far from the level in 2005, just before tech M&A set off on a two-year record run.

Recent quarterly deal flow

Period Deal volume Deal value
Q1 2011 881 $84bn
Q4 2010 775 $37bn
Q3 2010 768 $46bn
Q2 2010 773 $62bn
Q1 2010 847 $30bn

Source: The 451 M&A KnowledgeBase

Meltwater in the market

Contact: Brenon Daly

Having built a $100m business with its core media monitoring offering over the past decade, Meltwater Group is looking at picking up a small company or two this year to speed the development of the company’s next big line of business, CEO Jorn Lyseggen said earlier this week. Speaking at the Pacific Crest Emerging Technology Summit, Lyseggen said the bootstrapped private company is ‘leaning toward’ deals that bring specific IP that could bolster its recently launched products around media distribution and ad spending analytics, among other areas.

Meltwater used that strategy about a year ago to help expand an existing offering that monitored social media sources. The company already had a product, Meltwalter Buzz, before picking up BuzzGain, a 25-person startup. (We understand that Meltwater paid less than $5m for BuzzGain, its first acquisition.) Recently launched offerings by Meltwater, which claims 18,000 customers, include Meltwater Press, Meltwater Reach, Meltwater Drive and Meltwater Talent

Qatalyst strikes again, but bigger

Contact: Brenon Daly

When Jason DiLullo joined Qatalyst Partners last April, the boutique firm announced that he would play a major role in expanding the firm into semiconductor deals. Indeed he did. Qatalyst is getting sole credit for advising Atheros Communications on its sale to Qualcomm, the largest chip acquisition in four years. (On the other side, Goldman Sachs and Barclays Capital advised Qualcomm.) With an equity value of $3.6bn, it is Qatalyst’s largest deal – by about $1bn, no less – since it opened its doors in March 2008.

The chip deal brings the total value of the 10 transactions that Qatalyst has worked on to more than $17bn. Of course, the firm is primarily known for its role in helping to consolidate the storage sector, working on the sales of Isilon Systems and 3PAR last year, as well as Data Domain in mid-2009. (All three of those companies were erased from the market at their highest-ever valuation.) Collectively, the equity value of those three storage deals is about $7bn – ‘only’ twice the amount of Qatalyst’s sole chip deal.

Tech bankers see a bit more of everything in 2011

Contact: Brenon Daly

As we all know, banking is a cyclical business. And after a painfully sharp downturn in recent years, the business is swinging back. It looks to be swinging even higher in 2011, according to our annual survey of many of the top dealmakers. (See our full report on the results.) We would note, too, that the rebound is expected for both the tech M&A market as well as the tech banking industry itself.

Consider this: Four out of five tech investment bankers said their pipeline appears fuller now than it did a year ago, up from two-thirds of them who said the same thing in our previous year’s survey. If we flip it around, just one out of 20 bankers (7%) said the pipeline is drier than it was a year ago, down from one out of five (20%) who said the same thing in the previous survey. The recovery is even more pronounced when we consider that in our 2008 survey, more than half of the bankers said they had fewer mandates in the pipeline than they did the prior year.

Meanwhile, concerning the tech banking business itself, respondents indicated that their firms expect to be hiring more in the next six months. They also reported that deals were closing more quickly and fee rates on the transactions were actually ticking higher.

Ulticom’s shareholders cash out

Contact: Brenon Daly

Cash is king. We got a reminder of that tried-and-true business adage when we were skimming the terms of Ulticom’s sale to buyout shop Platinum Equity earlier this week. While the pending take-private is hardly a regal outcome for shareholders of the telecom software provider, the structure of the deal helps them get a bit more back from the business than they would have otherwise.

According to terms of Tuesday’s buyout, Platinum will pay $2.33 for each of the roughly 11 million shares outstanding at Ulticom. That works out to about $26m of equity consideration for the company. Far more important, however, the buyout shop will hand back roughly $64m of Ulticom’s $77m in cash to shareholders. This is actually a rare case of a cash ‘rebate’ being pocketed by the existing owners of a business (shareholders) rather than the soon-to-be owners. The bid works out to an enterprise value for Ulticom of about $16m, for a business that was likely to do around $38m in revenue in the current fiscal year.

Further, this is actually the second time that Ulticom has parceled out its cash. A bit of background: Ulticom is majority owned by Comverse Technology. The scandal-tainted company acquired Ulticom in 1996, which then spun off a chunk in a public offering in April 2000. That offering – along with a secondary shortly afterward – gave Ulticom way more money than it could ever use. While the company was sitting on a mountain of cash, interest in it was muted because Ulticom had to restate several years worth of financial filings because of options grants and revenue recognition issues. Those concerns pretty much sank Ulticom’s M&A plans in 2008, when it was being advised by Jefferies & Company.

Last year, however, Ulticom got itself back together. It settled with the SEC, got relisted on the Nasdaq and even threw a bone to long-suffering shareholders, paying out $200m in cash through a dividend. (Part of the reason Ulticom emptied out its treasury, we suspect, is to make it more attractive to private equity firms, which wouldn’t have to write such a large check for the company.) The move paid off for Ulticom, not to mention its shareholders. Morgan Keegan Technology Group (the former Revolution Partners) advised Ulticom on the deal, which is expected to close by January

Economic realities set in for boutiques

Contact: Brenon Daly

Already this month, we’ve tallied deals advised by boutique banks including Revolution Partners, Pagemill Partners, GCA Savvian and others. The firms are all part of an increasingly crowded low end of the tech M&A market, which we covered more fully in a special report on boutique banks. Consider this fact: Each year, more than 100 distinct firms advise on at least one transaction closed. (We track that information in The 451 M&A KnowledgeBase and use it in our annual league table rankings.)

Despite the increasing number of boutiques, their share of the market continues to decline, at least when looked at on the basis of percentage of overall M&A spending. In 2009, spending on transactions advised by boutiques fell to just 6% of overall tech M&A – down from about 10% of advised spending in both 2007 and 2008. That cutthroat competition has left more than a few small advisory shops desperately trying to keep their doors open.

We wouldn’t at all be surprised if some of the boutiques started to wind up their practices later this year, with some partners moving on to other firms while other partners get out of the business altogether. In some ways, a thinning of the ranks is overdue, at least according to the industry itself (bankers can be so cold-blooded). In each of our past two annual surveys of tech investment bankers, by far the more likely change they predicted for the overall banking landscape was the shutdown of boutique banks. In late 2008, roughly four out of five tech bankers told us that a number of boutiques were likely to close their doors in 2009, while last December, more than two out of three bankers said the same thing about this year.

Advisory market share*

Firm classification 2007 2008 2009
Boutique 9% 11% 6%
Bulge boutique 9% 6% 11%
Full-service midmarket 15% 14% 9%
Bulge bracket 67% 69% 74%

Source: The 451 M&A KnowledgeBase

*Based on disclosed and estimated deal values, as percentage of overall annual M&A spending

Fat cat bankers? More like alley cat bankers

Contact: Brenon Daly, Adam Phipps

If the recent upheaval in the tech advisory practices at bulge-bracket banks was primarily caused by exotic financial instruments that nobody could really understand or even value, the shakeup looming for boutique banks has its roots in something much more fundamental: supply and demand. Essentially, there is an ever-shrinking number of tech M&A mandates available for an ever-growing number of firms.

With all the scrapping and discounting in the low end of the market, many boutiques are finding that getting a print these days is a costly bit of business. So what happened that turned the boutique bankers’ once-profitable and vibrant practice into a market where they’re all tripping over each other to pitch and then trying to undercut each other on price? We’ll look at that question – and the implications of the answer – in a special report on boutique banks in tonight’s Daily 451.

Shrinking mandates

Year Number of sell-side transactions*
2010 300 (annualized number, based on Jan. 1-Aug. 15 activity)
2009 296
2008 397
2007 464

*US-based technology companies, excluding telcos, that used advisers

Source: The 451 M&A KnowledgeBase

Intel ‘inside’ of largest security acquisition

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

Date announced Acquirer Target Equity value
August 19, 2010 Intel McAfee $7.7bn
February 9, 2004 Juniper Networks NetScreen Technologies $4bn
June 29, 2006 EMC RSA Security $2.1bn
August 23, 2006 IBM Internet Security Systems $1.3bn

Source: The 451 M&A KnowledgeBase