Mirror moves at CA and Compuware

Contact: Brenon Daly, Dennis Callaghan

Both Compuware and CA Technologies recently announced deals for application development and the related field of performance monitoring in which the transactions themselves shared more than a few similarities. The two acquisitions saw the old-line companies, with their corporate roots in the mainframe era, paying nearly double-digit multiples for startups that have been doubling sales each year. Further, each buyer was adding the acquired technology to an existing management platform that has largely been shaped by earlier M&A.

In the first transaction, CA Technologies announced that it will hand over $330m in cash for ITKO, which adds testing capabilities to CA’s management portfolio as well as makes the company more of a player in ‘devops’ as cloud adoption blurs the roles between development and operations in IT departments. The following week, Compuware paid $256m in cash for dynaTrace Software to bolster its business transaction management offering, particularly in the area of pre-deployment performance monitoring, which goes hand-in-hand with testing. The two deals mean that the companies will be competing hard against each other in distributed systems performance testing and monitoring, especially around Java applications.

For the targets in the purchases, though ITKO and dynaTrace were focused on slightly different markets, the two startups had a number of traits in common. Both were founded far from Silicon Valley and went on to be parsimonious fundraisers, each drawing in only about $20m. (In other words, an exit price that was 10 times greater than the money that went into the company.) Both startups had more than 100 employees and were tracking to top $50m in sales next year. And finally, both startups went with boutiques to advise them on the sales, with ITKO tapping Qatalyst Partners and dynaTrace working with Pacific Crest Securities.

Oracle: two deals, but more than a year apart

Contact: Brenon Daly

Exactly a year ago today, Oracle announced its unexpected $7.4bn acquisition of Sun Microsystems. If it doesn’t seem like it was that long ago, that’s because it really wasn’t. Final approval for the deal dragged on for nine full months, largely because of scrutiny by the European Commission of Oracle owning Sun’s open source database, MySQL. Eventually, Brussels agreed with our initial assessment that MySQL and Oracle rarely competed (MySQL was focused mostly on the low end of the market and on Web applications), so they cleared the transaction.

The purchase of Sun is a singular deal for Oracle. (It brings the company into the hardware game for the first time, for instance.) And it stands out even more when compared with Oracle’s pickup on Friday of Phase Forward, which is the only public company that Oracle has snagged since Sun.

For starters, the price of Phase Forward is about one-tenth the price of Sun. But more significantly, Sun was a broad, horizontal acquisition, while Phase Forward is a vertical market play. The target serves life sciences companies offering a subscription-based way to keep track of clinical trials. (It has more than 335 customers.) And perhaps most notably, parts of Sun’s technology (Sparc and Solaris, among others) will be integrated into many offerings from Oracle, which is following the strategy of other systems vendors. On the other hand, Phase Forward will be slotted into the narrowly defined Oracle Health Sciences unit.

And the Golden Tombstone goes to …

Contact: Brenon Daly

We survey corporate development executives every year to get a sense of their shopping plans for the next 12 months. We’ll have a full report on the survey when we return from our holiday break in early January, but the headline finding is that two-thirds of the respondents expect the pace of M&A at their firms to pick up in 2010, compared to just 5% who see the rate tailing off. We would note that bullishness is echoed by technology investment bankers, who we also recently surveyed. (See our full report on the tech bankers’ survey.)

In addition to getting their outlook for the coming year, we also ask corporate development executives to pick a single deal that stood out to them as the most significant transaction of the year. The 2009 winner? Oracle’s still-pending $7.4bn acquisition of Sun Microsystems. Larry Ellison’s big gamble on hardware received twice as many votes as the second-place transaction, Hewlett-Packard’s reach for 3Com last month. (HP won the award last year for its purchase of services giant EDS.) Third place was claimed by EMC’s aggressive grab of Data Domain.

From our perspective, it’s fitting that Oracle’s purchase gets the coveted Golden Tombstone for 2009. (As an aside, it’s unintentionally accurate to be referring to ‘tombstones’ in connection with deals this year, if just because the M&A market was as quiet as a cemetery.) After all, 2009 has been characterized by transactions that are cheaper but take longer to close than in years past. Oracle, which announced the purchase of Sun in April but still hasn’t gotten full approval for it, is paying just 0.6x trailing sales for the faded tech giant. It was that kind of year for M&A, and one we’ll gladly put behind us. Here’s to a healthy and happy 2010 when we return from a much-needed break.

Golden Tombstone winners

Year Transaction
2009 Oracle’s $7.4bn purchase of Sun Microsystems
2008 HP’s $13.9bn acquisition of EDS
2007 Citrix’s $500m XenSource buy

Source: The 451 Corporate Development Outlook Survey

Where’s the hurry in Oracle’s reach for Sun?

Contact: Brenon Daly

Having gotten the all clear on this side of the Atlantic, Oracle is now waiting for the EU to sign off on its pending purchase of Sun Microsystems. And the company will have to wait a bit longer. The European Commission has a deadline of September 3 to determine if the deal would violate antitrust measures. If the body decides that it does, a subsequent probe could potentially drag on into 2010.

Granted, there’s a lot at stake in Larry Ellison’s plan to use the acquisition of Sun to turn Oracle into a systems vendor, as opposed to a company that just sells software. (Provided the transaction goes through, Oracle will be in a position to hawk Solaris and Linux servers, all running its own database, middleware and application software on the boxes.) And, as the largest tech buy since Hewlett-Packard purchased EDS in May 2008, Oracle’s $7.4bn reach for Sun is clearly not nickel-and-dime M&A.

But the pace of the review by regulators is absolutely glacial. Consider this fact: It took Oracle just two months to fully negotiate its purchase of Sun, according to proxy material. (Sun chairman Scott McNealy spoke with Ellison about a possible deal in late February; the companies announced the transaction on April 20.) More than twice that amount of time has elapsed since Oracle announced the deal – and regulators in Europe are still mulling it over.

Quick to offer, slow to vote

Contact: Brenon Daly

Even with the recent flurry of deal announcements, the pace of actually getting those proposed transactions in front of shareholders hasn’t necessarily followed suit. On Monday, a pair of buyers of public companies said they wouldn’t be holding votes on the proposed acquisitions, which were both announced in mid-April, until mid-July. To be sure, the anticipated three-month gap between announcing the transactions and shareholders voting on them isn’t alarmingly long. But it does continue the rather drawn-out dealmaking process that we’ve seen since the credit crisis tore apart Wall Street.

In the larger of the two announcements, Oracle said Sun Microsystems shareholders will have the opportunity to sound off on the planned $7.4bn deal on July 16. That is almost two weeks longer than it took to close its slightly larger purchase of BEA Systems last year. And if, as expected, Sun shareholders agree to the pending acquisition and Oracle closes it immediately, the time from announcement to closing would be roughly twice as long as the time for its multibillion-dollar purchase of Hyperion Solutions as well as its smaller acquisition of Stellent.

Meanwhile, Thoma Bravo, which plans to pick up Entrust, originally intended to put its $114m offer before shareholders on Monday. Instead, they will vote on the deal July 10. The delay comes despite not a single superior bid surfacing for the security company during its ‘go-shop’ period. The target said it shopped itself to 35 other potential suitors from mid-April to mid-May, but received only three non-binding offers. Entrust’s board didn’t judge any of them ‘superior’ to Thoma Bravo’s original offer. Shareholders will have their say on that in a month.

‘Animal spirits’ stir M&A market

Contact: Brenon Daly

The M&A market is back. OK, not really. But looking at this week’s deal flow, one could forget that spending on acquisitions plummeted 85% in the first three months of the year. (We recently noted that Q1 2009 was the first time since we began tracking tech M&A in January 2002 that we saw a quarter without a deal worth more than $1bn.) Literally as soon as the calendar flipped to April, we saw one 10-digit transaction, and that’s been followed by three others.

Of course, most people point to Oracle’s pending purchase of Sun Microsystems as evidence that ‘animal spirits’ (as Keynes would say) are starting to stir again. That purchase stands as the largest IT transaction since Hewlett-Packard’s $13.9bn acquisition of EDS last May. (Yesterday we reported how Oracle’s planned pickup has reshuffled our league table, at least in the early going of 2009.) Another way to view the mammoth size of the deal is to consider that the $260m break-up fee in Oracle-Sun is larger than all but 15 of the announced deal values so far this year. (As an aside, we would note that the $260m represents 3.5% of the deal value, which is a point above where many other transactions come in.)

However, there were other signs of life in the sector this week beyond that big acquisition. Well-known buyer Symantec returned to the market for the first time in a half-year, paying what we understand was $18m for Mi5 Networks. Also, private equity players notched a pair of deals. And we even saw an unsolicited bid for a public company. We would note that it wasn’t a run at some micro-cap company that no one has ever heard of, much less owns shares in. Emulex is a 30-year-old vendor that earns money and typically trades about three million shares each day. Broadcom offered $9.25 for each share of Emulex, for a total equity value of $764m. However, Emulex stock has been trading above $10 since the offer.

Oracle-Sun: a system on the cheap

Contact: Brenon Daly

Oracle’s big step into the hardware market comes at a relatively small price. In buying Sun Microsystems, Oracle is paying just one-tenth the valuation that it paid in its other multibillion-dollar acquisitions. The difference: the other purchases added software vendors with increasing sales and solid profitability, while Sun provides neither of those. Sun revenue is likely to slip about 10% in the current fiscal year, which ends in June, and the company has lost money in three of the past four quarters.

Still, the valuation drop-off is striking. Sun had generated some $13.3bn in trailing 12-month (TTM) revenue. Based on an offer that gives Sun an enterprise value (EV) of $5.6bn, Oracle is paying just 0.42x Sun’s TTM sales. In the four other acquisitions worth more than $1bn that Oracle has inked, the company has paid between 3.7x EV/TTM (Hyperion Solutions) and 5.2x EV/TTM sales (BEA Systems.)

Oracle’s multibillion-dollar deals

Date Target Equity value EV/TTM sales
December 2004 PeopleSoft $10.46bn 3.9x
January 2008 BEA Systems $8.5bn 5.2x
April 2009 Sun Microsystems $7.4bn 0.46x
September 2005 Siebel Systems $5.85bn 4x
March 2007 Hyperion Solutions $3.3bn 3.7x

Source: The 451 M&A KnowledgeBase

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?

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?

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.