Tag: M&A

Ambulance chasing in tech M&A

Brenon Daly

Contact:  Brenon Daly

Here’s another sign that tech M&A is getting more active: plaintiffs lawyers have come slithering back into the process. Instead of chasing ambulances, these lawsuit-loving lawyers are now following deal flow. Their tactic: before the ink is even dry on an M&A announcement, threaten an investigation into possible fiduciary breeches by the board at the selling company. To most, the pesky threats are little more than extortion.

In recent weeks, plaintiffs lawyers have taken aim at Chordiant Software for agreeing to sell itself for $161.5m to Pegasystems. (Never mind that Chordiant shareholders are getting 50% more than another suitor offered for the faded CRM vendor just two months ago. And they’re getting it all in cash.) But even more absurd is the decision by a handful of law firms to target Techwell’s decision to sell itself to Intersil in a transaction that gives Techwell a $450m equity value, or an enterprise value of $370m.

Intersil’s bid (on an enterprise value basis) works out to a rather rich valuation of 5.9 times Techwell’s 2009 sales and 4.2x projected 2010 sales, according to Intersil. (We would note that’s roughly twice the valuation that the market currently gives Intersil.) Terms call for Intersil to hand over $18.50 in cash for each Techwell share, a price that represents a relatively rich 50% premium over the previous day’s closing price.

Moreover, Intersil’s bid roughly matches the highest point Techwell shares ever hit on their own, which came back in November 2006. The offer is twice the price at which Techwell went public in mid-2006 and roughly three times the level where shares were changing hands just a year ago. Yet that outperformance hasn’t stopped at least five different law firms from charging that Techwell may not have done right by its shareholders.

Peer 1 in hosting hookup

Brenon Daly

by Brenon Daly, Philbert Shih

In what was pretty much a straight customer acquisition play, Canadian hosting provider PEER 1 Hosting said Thursday that it has picked up Atlanta-based VIA Net.Works USA. Although terms were not disclosed, the purchase of VIA Net.Works, which had $2m in trailing revenue, is almost certainly in the low single digits of millions of dollars. With the deal, PEER 1 has acquired just under 200 dedicated and managed hosting customers, which generate about 80% of total revenue. The remaining 20% of revenue comes through a base of shared hosting customers. PEER 1 has not yet decided what to do with these customers, but it is a good bet that they will be sold. VIA Net.Works’ customer base consists of SMBs that are basically all hosted on the Windows platform, although VIA Net.Works does support Linux.

The deal continues a relatively healthy flow of transactions in the hosted/managed services market. While overall tech M&A spending last year dropped by half, both the number and value of deals in the hosted/managed services sector actually ticked up in 2009. We saw some 83 deals worth $2.1bn in 2009, up from 77 deals worth $1.6bn in 2008. The pace picked up throughout the year, with two-thirds of the transactions announced in the second half of 2009. We recently published a summary of a Tier1 Research report on M&A activity in the sector. To purchase a copy of that report, click here.

M&A activity in the hosted/managed services market

Year Deal volume Deal value
2009 83 $2.1bn
2008 77 $1.6bn
2007 84 $2.7bn
2006 88 $1.9bn

Source: The 451 M&A KnowledgeBase

A rebound, but still short

Brenon Daly

Contact: Brenon Daly

Chordiant Software’s $161.5m sale to Pegasystems, which was announced on Monday and is expected to close next quarter, marks the 10th time this year that a company listed on the NYSE or Nasdaq has been set up to be erased from one of the exchanges. Granted, not all of the announced deals will get closed (Upek’s unsolicited bid for publicly traded rival AuthenTec comes to mind), and not all of the bids will play out smoothly (the hedge fund agitation against Novell, for instance), but it does indicate a rebound in activity from this time last year.

With the recession crippling the economy in early 2009, stock prices for many tech companies sank to their lowest level in more than a half-decade. (The Nasdaq bottomed out in early March 2009 at just under 1,300. The index closed Monday at 2,362 – some 80% higher than it was a little over a year ago.) In the first few months of 2009, few companies were in the mood to talk M&A. Buyers were worried about their own outlook, and figured they had enough risk in their own operations without compounding that with a big buy. On the other side of the table, few sellers were willing to part with their businesses at what they considered bargain prices. Consequently, deal flow dried up.

What’s interesting to note is that although the equity market has rebounded so far in 2010, we’re basically seeing the same pace of deals. There were 10 acquisitions of US-listed public companies in the first quarter of 2009 – the same number that we’ve seen so far this year. Yet spending on the deals has surged more than four-fold. Clearly, that’s an indication that buyers are more confident about the outlook for business and are willing to place larger bets on acquisitions. And while that pickup in spending has been welcome, we need to keep in mind that it’s still chump change compared to when the M&A market was more vibrant. Spending on public company deals announced so far this year ($7.5bn) is less than one-quarter the level that it was in both 2008 and 2007.

First-quarter Nasdaq/NYSE M&A activity

Period Deal volume Deal value Select transactions
Q1 2010 10 $7.5bn Elliott Associates-Novell; Pegasystems-Chordiant
Q1 2009 10 $1.8bn Autonomy Corp-Interwoven; Exar-Hifn
Q1 2008 19 $34.3bn Oracle-BEA Systems; BMC-BladeLogic
Q1 2007 21 $33.3bn Oracle-Hyperion; Cisco-WebEx

Source: The 451 M&A KnowledgeBase

A (belated) Oscar for IBM

Brenon Daly

Contact: Brenon Daly

We hand out our version of the Oscar every year in late December. (Like the movie industry award, our Golden Tombstone is voted on by folks in the industry, which, in this case, are fellow corporate development executives.) Last year, Oracle’s drawn-out acquisition of Sun Microsystems took the top spot, while the year before, Hewlett-Packard’s multibillion-dollar purchase of services giant EDS caught the voters’ favor. But watching Christopher Waltz and Mo’Nique last night pick up best supporting actor and actress, respectively, reminded us that we neglected to award our Golden Tombstone for best supporting strategic player last year.

The winner, of course, is IBM. It did a heap of due diligence on Sun and had the acquisition nearly done before it ‘failed’ to close it (to use the words of eventual acquirer Oracle). It’s actually the second time that Big Blue has done a lot of work on a multibillion-dollar transaction only to see a rival swoop in and carry off the target. IBM had an acquisition of WebEx all but inked before Cisco wrapped up a deal for the online conferencing vendor in less than two weeks, according to our understanding.

Next to nothing for Novell

Brenon Daly

Contact: Brenon Daly

As bargains go, Novell’s valuation in the recently floated bid from a hedge fund is a bit like a ‘crazy Eddie’ discount. Earlier this week, Elliott Associates offered $5.75 for each of the roughly 350,000 shares for Novell. Altogether, the equity value totals about $2bn.

But the true cost of Novell is actually about half that amount because the company carries about $1bn in cash and short-term investments. (Don’t forget that some of that cash flowed from Novell’s good friends at Microsoft, which handed over some $350m in cash several years ago and is still buying more licenses.) So, at the current valuation, what does the $1bn buy?

Perhaps the most revealing way to look at it is that Elliott (or any other buyer, for that matter) would get more than $600m in rock-steady maintenance and subscription revenue, meaning the bid values Novell at a paltry 1.6 times maintenance/subscription revenue. And let’s be honest, that’s the most attractive asset at Novell. The business actually grew in the just-completed fiscal year, while revenue from both licenses and services declined. (License revenue plummeted 38% in the previous fiscal year, and continued to slide in the most-recent quarter, which ended January 31.)

Novell has said only that it is reviewing the bid. (It is being advised by JP Morgan Securities, which also worked with Novell on its purchase of PlateSpin two years ago. At $205m in cash, that was the largest acquisition Novell had done in a half-decade.) Meanwhile, the market has indicated that it expects Novell to go for a bit more than Elliott’s ‘crazy Eddie’ discount price. Shares have traded above $6 each since Elliott revealed its $5.75-per-share bid, changing hands at $6.07 each in mid-afternoon trading on Thursday.

Will Google land On2?

Brenon Daly

Contact: Brenon Daly

At this rate, Google may never again go shopping on the public market. Its contentious reach for On2 Technologies, which has been bogged down for a half-year, will come to some kind of resolution after the close of the market today, with shareholders of the video compression software vendor set to vote on Google’s $136m offer. While Google has acquired nearly 50 companies in its history, the proposed purchase of Amex-listed On2 is the first time the search giant has bid for a public company.

When Google initially announced the planned purchase back in early August, it said it hoped to close the deal in the fourth quarter. (As an aside, we’d note that since the original announcement, Google has picked up six private companies, all of them without the drama that has surrounded the proposed On2 acquisition.) The target deadline came and went, and then in early January, Google said it was adding a cash kicker to its original all-equity bid for On2.

Google’s first offer of roughly $106m of its shares for On2 hadn’t drawn enough support from On2’s shareholders. So, the deep-pocketed buyer reached a bit deeper into its pockets to add a $26m all-cash sweetener. Google says the $136m bid is its ‘final’ offer. On2’s board of directors, as well as the three main proxy advisory firms, have all urged the vendor’s shareholders to vote for Google’s proposed purchase this afternoon.

Autonomy and Art Technology: Lower after raising

Brenon Daly

Contact: Brenon Daly

There’s money, and then there’s expensive money. To underscore the difference, consider a pair of recent money-raising offerings from notably acquisitive companies. First, the worst. Art Technology Group announced earlier this month that it intended to hold a 25-million-share secondary, with an undisclosed portion of it earmarked for possible acquisitions. The plan didn’t find many fans on Wall Street, who carped about a profitable company adding 25 million additional shares on top of a base of about 135 million.

Art Technology shares promptly went into a tailspin. By the time the e-commerce firm had priced them, investors had clipped 22% off the stock. So instead of raising about $113m, the vendor had to settle for $88m (excluding overallotments). Even though Art Technology had to take a haircut on the secondary, it did at least get it done. With it, the debt-free company more than doubled the amount of cash it has on hand and could be a serious consolidator in the market. Already this year, Art Technology made a rather smart purchase of InstantService, a startup providing customer service through online chat and email.

And, although the reaction wasn’t nearly as severe, Autonomy Corp also took a mild hit from its investors when it announced plans to raise some $785m in a convertible offering last week. Adding those proceeds into its already well-stocked treasury will give Autonomy more than $1bn to go shopping with, although some of that will have to go to pay for its earlier Interwoven acquisition. Over the past three years, Autonomy has picked up five companies for a total of $1.2bn, although Interwoven accounts for two-thirds of the aggregate spending. As to what Autonomy might be looking to buy with its newfound riches, my colleague Nick Patience says in a recent report that he could imagine Autonomy going into marketing automation and BI, and he even has a few names that could well be on Autonomy’s shopping list.

More than one way to market

Brenon Daly

by Brenon Daly

Apparently, UPEK really wants to be a public company. It put in its IPO paperwork back in mid-2007, only to pull it in March 2008. Unlike other former filers, however, the biometric security vendor hasn’t dusted off its S-1 in an attempt to hit the public markets. (In the past week, both Convio and GlassHouse Technologies have re-filed to go public.) Instead, UPEK wants to get on the Nasdaq by picking up a rival that already trades there.

UPEK lobbed an unsolicited offer at AuthenTec on Friday that basically envisioned consolidating the two companies, which make fingerprint sensors, into a single business. Equity ownership would be evenly divided between the two sides. For its part, AuthenTec has been a public company since mid-2007, although its shares have lost some three-quarters of their value in that time. On Monday, AuthenTec, advised by America’s Growth Capital, rejected UPEK’s ‘highly dilutive and speculative transaction.’

No recession for mobile advertising M&A

-Contact Thomas Rasmussen

Following Google’s purchase of AdMob in November, we predicted a resurgence in mobile advertising M&A. That’s just what has happened and, we believe, the consolidation is far from having run its course. Apple, which we understand was also vying for AdMob, acquired Quattro Wireless for an estimated $275m at the beginning of the year. At approximately $15m in estimated net revenue, the deal was about as pricey as Google’s shopping trip for its own mobile advertising startup. And just last week, Norwegian company Opera Software stepped into the market as well, acquiring AdMarvel for $8m plus a $15m earnout. We understand that San Mateo, California-based AdMarvel, which is running at an estimated $3m in annual net sales, had been looking to raise money when potential investor Opera suggested an outright acquisition instead.

These transactions underscore the fact that mobile advertising will play a decisive role in shaping the mobile communications business in the coming years. For instance, vendors can now use advertising to offset the costs of providing services (most notably, turn-by-turn directions) that were formerly covered by subscription fees. Just last week, Nokia matched Google’s move from last year by offering free turn-by-turn directions on all of its smartphones. Navigation is only the beginning for ad-based services as mobile devices get more powerful and smarter through localization and personal preferences.

While traditional startups such as Amobee will continue to see interest from players wanting a presence in the space, we believe the next company that could enjoy a high-value exit like AdMob or Quattro will come from the ranks that offer unique location-based mobile advertising such as 1020 Placecast. The San Francisco-based firm, which has raised an estimated $9m in two rounds, is a strategic partner of Nokia’s NavTeq. As such, we would not be surprised to see Nokia follow the lead of its neighbor Opera by reaching across the Atlantic to secure 1020 Placecast for itself.

Is IBM about to ‘initiate’ a major MDM purchase?

Brenon Daly

Contact: Brenon Daly

Although we recently noted that SAP may be considering a major master data management (MDM) move, we understand that the next buyer in the market may actually be IBM. We’ve heard from several sources that Big Blue is close to announcing an acquisition of Initiate Systems. If the deal does indeed happen, Initiate would substantially boost IBM’s offering for the healthcare industry. Despite being competitors, Initiate and IBM Global Services have been longtime partners for healthcare projects. The transaction could happen as soon as this week, we’re told. And we gather that it’ll come at a rather rich valuation for Initiate.

One of the largest stand-alone MDM vendors, Initiate filed to go public back in November 2007, but withdrew its IPO paperwork the following summer. (Goldman Sachs was lead underwriter of the planned offering.) Shortly after it pulled its prospectus, it announced a $26m funding round that included strategic investments from both EMC and Informatica. However, we hear that the biggest competition for IBM’s rumored bid for Initiate may have come from the public market.

Given the very real prospect that Initiate could reheat its plans to go public, IBM would effectively have to top the valuation that Initiate could receive in an IPO and afterward. We understand that the company was running around breakeven and likely did just shy of $90m in 2009. (That would imply mid-teens growth from the $76m in revenue that Initiate recorded in 2008.) With that dynamic at play, Initiate may well garner 4.5-5x sales in the trade sale to IBM, according to sources.