Tag: M&A

Imagining ‘what if’ on Tripwire

Brenon Daly

Contact: Brenon Daly

As we were skimming through Tripwire’s recently filed IPO paperwork, we couldn’t help but wonder ‘what if….’ Specifically, we were wondering what the company would be like if it had gone for the other exit and taken the rumored offer from BMC more than three years ago. At the time, Tripwire was only about half the size it is now and nowhere near as profitable. But with the benefit of hindsight, it’s almost certain that Tripwire would have been valued at a much richer multiple in a trade sale during a time when M&A dollars were flowing freely (late 2006-07) than by going public in the current bearish environment.

To be clear, that’s not a knock on Tripwire. As we highlight in our report on the proposed offering, the company has a solid growth story to tell Wall Street: six consecutive years of revenue growth, while generating cash in each of those years. Instead, it’s just a reflection of the dramatic change in the valuation environment over the past three years. Consider this: In March 2008, BMC paid roughly 11 times trailing sales and 9x projected sales for BladeLogic, a valuation that wasn’t at all out of whack for the fast-growing datacenter automation vendor. (It was actually lower than what Hewlett-Packard spent on Opsware, a BladeLogic rival.)

While we have no idea what kind of valuation BMC was kicking around for Tripwire at the time, we have to believe it’s above the multiple we have penciled out for the IT security and compliance vendor in its market debut. Because of the bear market, we figure Tripwire will probably come public at about $300m. If that initial valuation holds more or less accurate, it will value Tripwire at basically 4x trailing sales and 3x projected sales – just one-third the valuation that BladeLogic got in its sale.

Who’s calling on Callidus?

Brenon Daly

Contact: Brenon Daly

Annual shareholder meetings are typically uneventful affairs, mixing equal parts of corporate glad-handing and self-congratulatory pabulum. The few bits of business that do get done are generally little more than corporate housekeeping, such as electing board members and signing off on auditing firms. And while that’s probably how the annual meeting for Callidus Software will go next Tuesday, we have picked up on some rumblings of discontent from the shareholder base of the sales performance management (SPM) vendor.

Shares of Callidus have basically been changing hands in the $2.50-3.50 range for the past year and a half. (On Friday afternoon, the stock traded at $3.10.) After going public at $14 in November 2003, the stock spent the next four months at around that level before dropping into the single digits, where it has remained ever since. At current prices, the company sports a market cap of nearly $100m.

With shares having been basically dead money, even as the market rebounded, investors are growing impatient with Callidus’ still-incomplete switch from a license-based software vendor to an on-demand model. Undeniably, the company has made progress in that difficult transition, but it has come up short in both its emerging SaaS business and its old-line business, particularly services.

That inconsistency hasn’t won it many fans on Wall Street, which is reflected in Callidus’ valuation. On a back-of-the-envelope basis, the company is trading at basically a $70m enterprise value, or just 1.4 times its 2010 recurring revenue (roughly $50m total, with $20m maintenance fees and $30m subscription revenue). It seems we aren’t the only ones struck by the rock-bottom valuation of Callidus. Several market sources have indicated recently that at least one would-be suitor has approached Callidus about a deal.

Our understanding is that Callidus has retained a banker and is still in the early stages of an initial market canvass. Obviously, that’s a long way from a completed transaction, which is the outcome many Callidus shareholders are hoping for. It’s also worth remembering that the company itself has a spotty track record in M&A. In late 2008, Callidus was lead bidder for SPM startup Centive, and stood to substantially accelerate its transition to SaaS with the acquisition. Instead, Xactly – a startup that’s run by a number of former Callidus executives – snatched away Centive in early 2009.

What bear market?

Brenon Daly1 Comment

Contact: Brenon Daly

With one month still remaining in the second quarter, we can’t help but notice that M&A spending is running much higher than it was in the first three months of the year. The total bill for tech deals in April and May hit $41bn, which is one-third higher than the $31bn we tallied for the entire first quarter. If spending continues at this pace in June, Q2 will register the highest quarterly spending total for tech M&A since the Credit Crisis.

The recent surge of spending is largely being driven by the return of the big deals. Indeed, the number of Q2 transactions is tracking to a notably lower number than the 845 deals that we saw in Q1. (In the first two months of Q2, we tallied some 500 transactions, implying about 750 for the full quarter.) But recent deals have been significant, with three of the four largest transactions for all of 2010 having been announced in April and May. Fully 10 of the 17 deals valued at $1bn or more that have been announced so far this year have come in the past two months.

Further, it’s been big-name tech buyers that have figured into the shopping spree over the past two months. SAP, IBM, Hewlett-Packard and Symantec have all announced a 10-digit transaction since the beginning of April. We would hasten to add that the companies are doing these multibillion-dollar deals despite the fact that their stocks have taken a pounding over the past two months. Shares of SAP, HP and Symantec are all down about 13% in the period. (Big Blue has shed 4%.)

The declines in the shares of three of the acquisitive tech giants are actually steeper than the 8% slide in the Nasdaq since April 1. Given the recent bear market, we would have expected M&A to tail off rather than accelerate. Similarly, we would have expected deal activity in Q1, when the Nasdaq rose 6%, to be higher than Q2, when it was down an even larger percentage. But apparently, the long-standing correlation between the stock market and M&A activity has been snapped. At least it has been for now.

The German giant’s gamble

Brenon Daly

Contact: Brenon Daly

In the largest software transaction in more than two years, SAP plans to pick up mobility software and database vendor Sybase for a net cost of $5.8bn. SAP’s all-cash bid of $65 per share represents a 44% premium over the three-month average closing price for Sybase. More dramatically, SAP’s offer represents the highest price for Sybase stock in the target’s two decades as a public company.

The purchase, which is expected to close in July, represents a big bet by the German giant on the future of mobile applications. The two companies have partnered for more than a year, with SAP offering mobile CRM and Business Suite applications on Sybase’s Unwired Platform. Currently, mobile products account for one-third of revenue at Sybase, which started life as a database vendor. Within the database segment, Sybase also has an analytic database (Sybase IQ) that has been generating most of the growth in recent years.

At an enterprise value of $5.8bn, SAP is valuing Sybase at basically 5 times sales. (Sybase generated revenue of $1.1bn in 2009 and recently guided Wall Street to expect about 6% sales growth this year.) That’s roughly in line with the multiple SAP paid in its other large deal, the $6.8bn acquisition of Business Objects in October 2007. It’s not out of whack with SAP’s own valuation. The company trades at about 4 times sales, and that’s before any acquisition premium is figured in. Viewed another way, SAP trades at roughly 14 times cash flow, while it is paying 15 times cash flow for Sybase.

Where might Symantec shop?

Brenon Daly

Contact: Brenon Daly

After its double-header encryption deals last week, Symantec appears set to return to M&A. Like a number of tech giants, Big Yellow largely shunned dealmaking last year. But the drop-off was particularly notable at Symantec: It spent more than $1bn on acquisitions in both 2007 and 2008, but less than $100m in 2009. We would hasten to add that in the fiscal year that just ended on April 2, Symantec generated $1.7bn in cash flow from operations. That brought its cash stash to more than $3bn.

As to where the company might be shopping, my colleague Paul Roberts in our Enterprise Security Program outlines five areas that make sense for Symantec to buy its way into – as well as who might be of interest in those markets. In a new report, Roberts looks for M&A activity from Symantec in the following areas: threat detection and reputation monitoring, SIEM and vulnerability management, enterprise rights management, database security and endpoint control. All of those areas are a long way from Symantec’s original market of antivirus software.

A final thought on Big Yellow and its possible shopping is that the company actually enjoys a fair amount of goodwill on Wall Street right now. Symantec’s fiscal fourth quarter, which it reported Wednesday, was surprisingly strong for many investors, particularly after rival McAfee had a less-than-stellar first quarter. In fact, on many trading screens Symantec was the only green stock Thursday on an otherwise blood-red day. Symantec shares closed up less than 2%, but that was on a day that saw the Dow Jones Industrial Average plummet almost 1,000 points, or 9%, in afternoon trading.

Palm’s down

Brenon Daly

Contact: Brenon Daly

Just two weeks ago, we wrote that we thought Palm Inc would be a tough sell because the cash-burning smartphone pioneer seemed mired in irrelevance, both to consumers and developers. OK, so we were a bit off on that. The company apparently appeared relevant enough to Hewlett-Packard for the tech giant to hand over more than $1bn in cash for Palm.

While Palm’s board has backed the deal, it appears to be a bit of a tough sell to the company’s shareholders, who have bid Palm stock above the offer since it was announced. From their perspective, anyone who bought the stock over the past year – with the exception of a period from roughly mid-March to mid-April – is underwater, despite the 23% premium offered by HP. Palm shares changed hands at twice the level of HP’s bid for most of January.

But then, valuing Palm has always been tricky, going back to its fitful birth on the Nasdaq as a spin-off from 3Com. (As a side note, HP’s pending pickup of Palm would reunite the smartphone company with its former parent, as HP just closed its purchase of 3Com three weeks ago.) When the tiny stake of Palm hit the market in early 2000, investors were pushing each other out of the way to get their hands on Palm (if you will). The company finished its inaugural day on the Nasdaq at a valuation of some $50bn – roughly twice as much as Apple was worth at the time. Today, Apple fetches a market cap of $250bn, while Palm just sold for $1.4bn.

Aftershocks on the tech M&A banking landscape

Brenon Daly

Contact: Brenon Daly

In our report on the 2009 league table, we noted that Wall Street had been rocked by an earthquake in 2008 but that the smaller aftershocks were continuing to ripple across the tech banking landscape. Another one of those was felt Monday, when Thomas Weisel Partners agreed to sell itself to a rather old-line institution, Stifel Financial, for around $300m in stock. The deal, which is slated to close this quarter, would add TWP’s investment banking business, with its focus on tech, healthcare and alternative energy, to Stifel, which is known more for its transactions involving financial institutions and real estate.

In 2008, we counted 11 acquisitions of firms involved with tech M&A, including powerhouses such as Bear Stearns, Lehman Brothers and Merrill Lynch. The number of deals in 2009 dropped, as did the size of them. There were just five purchases of investment banks with tech practices last year, including the pickup of Cowen and Co by hedge fund Ramius Capital and Raymond James & Associates’ acquisition of Lane, Berry & Co.

As we look at the league table, we’re struck by the fact that Stifel is adding a pretty busy tech advisory shop by buying TWP. (If you would like a copy of our 2009 league table report, just email me.) Last year, TWP finished tied for 12th place (with Citigroup) in terms of the number of IT transactions that it worked on. On a pro forma basis, adding Stifel’s four deals to the 10 that TWP banked would put the combined entity at 14 IT transactions, tied for fifth place.

If anything, TWP has picked up its pace this year. It has already worked on five deals worth more than $1.2bn, including sole sell-side credit on the pending $755m sale of Phase Forward to Oracle. Additionally, it’s been arguably the most-active midmarket underwriter of tech IPOs. TWP is sole bookrunner for offerings from SciQuest as well as SPS Commerce, which was one of the few IPOs last week that actually finished above water. It is also co-lead on Tangoe, which filed earlier this month, and Convio, which is slated to price this week.

Disconnected at Palm

Brenon Daly

Contact: Brenon Daly, Chris Hazelton

Palm Inc has lost a key set of hands. In an SEC filing Friday, the troubled company said that the head of its software and services, Michael Abbott, will be cleaning out his desk by the end of this week. (No word yet if he’ll also have to give back his smartphone.) The departure is significant because Abbott was responsible for building third-party developer support for Palm’s smartphone platform, which has lagged well behind the developer communities for Apple’s iPhone and Google’s Android OS. It also underscores one of the key problems at Palm, which we explored in more depth in a recent report.

Specifically, Palm has precious little to show for its efforts to stay relevant in the mobile world. Here’s our back-of-the-envelope math: the company will spend in the neighborhood of $300m on sales and marketing and another $200m on R&D for the current fiscal year, which ends next month. (The levels are basically annualized totals from the first three quarters of the current fiscal year.) We would also add that they are significantly higher than spending levels at rival vendors. For instance, Palm spends 2.5 times more on R&D (as a percentage of revenue) than Blackberry maker Research In Motion.

Adding together sales and marketing plus R&D spending at Palm, we get about $500m, compared to projected revenue of about $1.1bn. And what does the company have to show for that half-billion-dollar outlay? Palm’s already tiny slice of the smartphone market actually got smaller this fiscal year. And yet, despite that dismal return on investment – not to mention a key executive departure – speculation continues to swirl that Palm will get snapped up. Most often, HTC, Lenovo or even Motorola are named as suitors for Palm. However, in our report, we note key reasons why those vendors wouldn’t be interested. For our money, Dell still seems the most-logical buyer of Palm.

Nokia browses for an advantage

Contact: Jarrett Streebin

In an effort to increase its appeal in emerging markets, Nokia has bought Novarra, the first of two deals in as many weeks. With the acquisition, Nokia obtains Novarra’s faster and more-efficient browser, which is important in emerging markets where bandwidth limitations exist. Nokia is also playing catch-up with players like Apple and Research In Motion that already have their own browsers.

Nokia ships more than 400 million phones annually, many to customers in emerging markets such as Africa, Asia and South America. Having a fast, low-bandwidth browser like Novarra will enable Nokia to better attract carriers in these regions and with the smartphone craze just starting to take off, the company gains an edge on competitors whose browsers require more bandwidth.

Although the deal value wasn’t released, we understand that Nokia paid roughly four times trailing sales for Novarra. The 10-year-old startup had received $88 million in funding from JK&B Capital, Qualcomm, Fort Washington Capital Partners, Kettle Partners and Colorado Investment Securities, with $50m of this coming in a round in 2007.

This move will also affect Novarra’s rivals such as Opera Software and Mozilla. The impact on Mozilla will be limited because its browser targets 3G smartphones like Nokia’s N900 to provide a rich, unconstrained mobile browsing experience. Opera is currently the market leader in mobile browsing, with more than 50 million active users, many of whom are using Nokia phones. Now, Nokia will have its own browser to compete. Although this will cut Opera’s market share, Vodafone has already announced that it will be preloading Opera on many of its phones in emerging markets. It could be that Vodafone needs a browser of its own, too.

Consistently inconsistent M&A in Q1

Brenon Daly

Contact: Brenon Daly

The first quarter is in the books and it’s hard to read much from it, at least in terms of M&A. While the quarter saw more deals announced than any other quarter since the credit crisis erupted, the aggregate spending on those transactions is lingering about one-third below the recent average. In the just-completed quarter, we recorded 841 acquisitions, with a total bill of $31bn. (We should note that nearly one-third of the M&A spending in the quarter came on a single telecom deal, where an Asian operator spent $9bn on mobile businesses in Africa just two days before the end of the quarter.)

Overall, the numbers point to an inconsistent recovery in the M&A market. On the one hand, many of the big buyers were busier than ever. CA Inc, Google, IBM and Oracle (among others) all announced at least three transactions in the just-completed quarter. But on the other side, we also saw a number of deals that continued the worrisome trends that we thought we might have left behind in 2009, with additional scrap sales and low-multiple divestitures in the first few months of 2010. Look for our full report on first-quarter M&A in tonight’s MIS and TDM sendouts.

Recent quarterly M&A activity

Period Deal volume Deal value
Q1 2010 841 $31bn
Q4 2009 822 $55bn
Q3 2009 758 $38bn
Q2 2009 778 $49bn
Q1 2009 663 $10bn

Source: The 451 M&A KnowledgeBase