Tag: M&A

Will Taleo exercise its M&A option?

Brenon Daly

Contact: Brenon Daly

Having crossed the anniversary of its acquisition of Vurv Technology earlier this summer, Taleo recently indicated that it is looking to return to the M&A market. (Shares of the human capital management vendor trade essentially where they did when the company closed its $128m consolidation play with Vurv, while the Nasdaq is down about 12% over that same period.) Taleo’s pickup of Vurv was its largest-ever transaction, roughly doubling the number of customers for the company. The success that Taleo has enjoyed with migrating Vurv users to its own platform stands in sharp contrast to the other main consolidation play by a publicly traded rival, Kenexa’s $115m reach for BrassRing in 2006.

If we had to speculate on Taleo’s next M&A move, we suspect it would involve exercising a kind of ‘call option’ that it has on a startup. What do we mean by that? Last summer, when Taleo had its hands full with Vurv, it also made a $2.5m equity investment in a Redwood City, California-based startup called Worldwide Compensation (WWC). So rather than take on another acquisition immediately, Taleo smartly structured its investment – its only such investment – to give it right of first refusal to pick up all of WWC at any time through the end of 2009.

The investment in WWC comes with a partnership that adds WWC’s compensation management offering to Taleo’s core performance management products. In the second quarter, Taleo reported that it had three joint deals with WWC involving enterprise customers. As pay-for-performance offerings get more widely adopted, we could certainly imagine a case where Taleo would want to bring WWC in-house. In that regard, we might view the WWC investment as just a ‘try before you buy’ arrangement for Taleo.

Bleak outlook for social networking M&A

-Contact Thomas Rasmussen

In a sign of just how far the social networking market has fallen, brightsolid’s $42m purchase earlier this month of Friends Reunited from ITV Plc stands as the largest deal in the sector so far in 2009. The price is a mere 5% of the value of the largest social networking acquisition in 2008, which was AOL’s $850m all-cash pickup of Bebo. (We would also add that the sale of Friends Reunited netted ITV just one-fifth the amount it originally paid for the property in 2005.) On top of the notably smaller transactions, deal flow so far this year has been characterized by relatively paltry valuations. Friends Reunited garnered just 1.6 times trailing sales, compared to the estimated 42 times trailing revenue that Bebo got from AOL. Add all that together and it’s pretty clear that the bubble of social networking M&A has popped. In the space so far this year, we tally just 28 deals worth a total of $55.5m, compared to 53 transactions valued at more than $1.3bn in 2008.

As an aside, we would note that the acquisitions of Friends Reunited and Bebo have more in common than just ranking as the largest deals of their respective calendar years. The stalking horse bidder for Friends Reunited, Peter Dubens through his investment vehicle Oakley Capital Private Equity, has a close business relationship with Bebo founder Michael Birch. Dubens and Birch formed PROfounders Capital earlier this year under Dubens’ Oakley Capital umbrella. Oakley Capital reportedly offered to buy Friends Reunited for $25m, but declined to bump up its bid above even one times sales. Without reading too much into that, we might be tempted to conclude that except for Facebook, the little value that remains in most social networks is likely to only decline.

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

Brenon Daly

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.

VMware: a ‘table-clearing’ bid for the clouds

Brenon Daly

Contact: Brenon Daly

About a year and a half after Paul Maritz got picked up by EMC, the former Microsoft honcho has struck his signature deal for his new employers. When EMC reached for Pi Corp, which had yet to release a product, we figured the move was basically ‘HR by M&A.’ And that has turned out to be the case, as Maritz took over leadership of EMC’s virtualization subsidiary VMware in July 2008. He stepped into the top spot just as VMware’s once-torrid revenue growth had dwindled to a trickle. Sales at VMware rose 88% in 2007 and 42% in 2008, but are projected to inch up just 2% this year.

To help jumpstart VMware’s growth, Maritz looked to the clouds, pushing through the acquisition of SpringSource earlier this week. At roughly twice as much as VMware has spent on its previous dozen deals, the SpringSource buy is the virtualization kingpin’s largest purchase. It was also, as we understand it, a deal very much driven by Maritz. (Because the purchase topped $100m, it also had to be blessed by VMware’s parent, EMC. This indicates that Maritz enjoys a level of support at the Hopkinton, Massachusetts, HQ that probably wasn’t extended to his predecessor, VMware founder Diane Greene.)

As we have noted, no bankers were involved in negotiations and one source indicated that terms were hammered out directly by Maritz and his counterpart at SpringSource, Rod Johnson, in a scant three-and-a-half-week period. Not that there was much negotiating needed. As we understand it, Maritz approached Johnson with a ‘table-clearing’ offer of $400m. SpringSource didn’t contact any other potential buyers, and in fact, the five-year-old startup only weighed VMware’s bid against the possibility of going public in 2011. (Subscribers to the 451 M&A KnowledgeBase can click here to view our estimates on SpringSource’s revenue, both trailing and projected, as well as its valuation.)

However, the source added that getting to an IPO would have likely required another round of funding for SpringSource. The dilution that would come with another round, combined with the deep uncertainty about the direction of the equity markets, tipped SpringSource toward the trade sale. In the end, that decision – and how Maritz executes on his step into application virtualization – will go a long way toward shaping his legacy at VMware.

Will Fortinet go shopping after going public?

Brenon Daly

Contact: Brenon Daly, Paul Roberts

Not that Fortinet actually needs more cash to go shopping, but the company will likely substantially fatten its treasury by the end of the year. Officially, the security vendor, which has been generating cash for the past three years, said in its IPO prospectus this week that it plans to raise $100m. However, we suspect the actual amount that it raises could be as much as $200m, a fitting offering for a firm that may well hit the market with a valuation in the neighborhood of $1bn. (Which exchange Fortinet debuts on is still undecided. We can only imagine the fight between the NYSE and the Nasdaq over listing a big-time IPO like Fortinet in such a lean time for new offerings.)

Whatever the amount of money Fortinet ends up raising in the offering, it will have plenty to go shopping. (Not to mention the fact that it will also have freshly minted shares if it wants to do a larger deal.) My colleague Paul Roberts, who heads our security practice, put together a possible shopping list for the company back in April, based on our understanding that Fortinet was a few months away from filing to go public. Roberts discussed a number of possibilities for Fortinet, including network access control and perhaps WAN traffic optimization.

However, he argued that Fortinet would perhaps be best served by making a play for an enterprise security information management (ESIM) provider to make sense of all the information generated by the various offerings. And, as fate would have it, Fortinet already knows one ESIM vendor rather well. Since 2004, the company has been OEMing eIQnetworks’ Network Security Analyzer and reselling it as FortiReporter.

SaaS deals echo in security industry

Brenon Daly

Contact: Brenon Daly

There are more than a few echoes of Symantec’s purchase of MessageLabs last October in McAfee’s reach last week for MX Logic. In terms of strategy, both acquisitions added millions of end users of on-demand security to the two largest security software companies, which have been slowly looking to increase that side of their business. MessageLabs had attracted more than eight million users at 19,000 customers, while MX Logic brings more than four million users at 30,000 customers.

As far as deal terms go, both buys were done at a similar valuation. Symantec paid 4.8 times trailing sales for MessageLabs, while we estimate McAfee is paying closer to 4 times trailing sales for MX Logic. (If we include the potential $30m earnout in the price, the multiple hits 4.9 times MX Logic’s trailing revenue.) And, we would add that both deals stand as the largest security transactions of their respective years, with the sales of these private software-as-a-service (SaaS) companies eclipsing the prices paid even for public vendors. Symantec shelled out $695m in cash for MessageLabs, topping McAfee’s $497m pickup of Secure Computing as the largest security deal in 2008. So far this year, McAfee’s $140m purchase of MX Logic is the industry’s biggest security transaction, slightly ahead of the contested take-private of Entrust for $124m.

We also suspect that both SaaS acquisitions will pay dividends for Symantec and McAfee. (We have heard from several sources that Symantec is particularly high on its reach across the Atlantic for MessageLabs.) Undoubtedly, these deals will deliver a higher return than the other large SaaS security acquisition, Google’s pickup of Postini. Done two years ago, that buy handed Postini a valuation that’s twice as rich as either MessageLabs or MX Logic. But unlike the moves by Symantec and McAfee, Google didn’t snag Postini for its security offering. Instead, the search giant had the ill-conceived notion that a startup could serve as the platform for its push of Google Apps. Not surprisingly, that idea hasn’t panned out. We certainly haven’t heard much about Postini in the two years since the search giant bought it.

id Software exit signals continued consolidation in gaming

-Contact Thomas Rasmussen

While we have been expecting continued consolidation in the gaming sector for a long time now, we didn’t see this combination coming. Id Software, a staunchly independent, Mesquite, Texas-based shop best known for founder John Carmack and the Doom franchise, sold recently to Rockville, Maryland-based ZeniMax Media. ZeniMax is a relatively small, privately held publisher, having picked up Bethesda Software in 2001. However, the firm has wealthy backers. It raised $300m in 2007 from private equity shop Providence Equity Partners and according to a US Securities and Exchange Commission filing, raised another $105m in debt financing on July 7, which was specifically earmarked for the acquisition of id. Given that ZeniMax undoubtedly wants to retain id’s employees (even giving a seat of the board to id CEO Todd Hollenshead), we suspect ZeniMax also had to tap into its equity to cover the purchase price, which wasn’t revealed.

This deal makes us wonder about the outlook for the remaining independent legacy videogame studios. Specifically, we’re referring to Bellevue, Washington-based Valve Corp and Cary, North Carolina-based Epic Games. Not that we’re suggesting any formal shopping is taking place. But if the id exit shows us anything, it is that in a time when development costs are skyrocketing and financing is harder to come by, it might be wise for studios to join forces with a larger publisher. That’s particularly true as the current economic slump has painfully shown that the videogame industry is not as ‘recession-proof’ as some people had hoped. Shares of Electronic Arts, which serve as a kind of proxy for the entire videogame industry, have been cut in half over the past year, compared to a mere 6% decline in the broader software stock index during the same period.

Videogame-related M&A by the big four, 2006-present

Acquirer Number of acquisitions Total known deal value
Activision Blizzard 10 $5.69bn (includes merger with Vivendi)
Electronic Arts 9 $771m
Microsoft 4 $235m
Sony 6 N/A

Source: The 451 M&A KnowledgeBase

IBM’s ‘Tuesday twofer’ still leaves it behind most years

Brenon Daly

Contact: Brenon Daly

In a highly unusual move, IBM did the M&A equivalent of a ‘Tuesday twofer,’ buying both big and small yesterday. In terms of the high-dollar deal, Big Blue said it will hand over nearly $1.17bn in cash for predictive analytics software vendor SPSS. The purchase of SPSS is the company’s largest transaction since it shelled out $5bn for Cognos in November 2007. In fact, we suspect the $1.17bn paid for SPSS is roughly the same amount that IBM spent on the nine deals it has announced (many of them with prices undisclosed) since picking up Cognos.

On the smaller side, IBM also said yesterday that it has acquired startup Ounce Labs, which makes source code analysis software. Terms weren’t revealed, but we wouldn’t be surprised to learn that the amount IBM paid for Ounce Labs was just 1% of the price it forked over for SPSS. Ounce Labs had raised some $29.5m in venture backing.

As a final thought on Big Blue’s doubleheader yesterday, we would note that the two purchases double the number of acquisitions that IBM has announced so far this year. The total of four deals in 2009, however, is basically half the number it had announced by this time in any of the previous three years.

Turning down the trade sale

Brenon Daly

Contact: Brenon Daly

Since the Wall Street crisis erupted last fall, the M&A advice most companies have gotten has been not to sell unless they absolutely have to. That sentiment has quieted overall dealmaking activity, as well as pressured valuations across the board. It turns out that not even promising startups could escape the malaise. Later this afternoon, Tim Miller, our head of financial markets, will present our findings on the status of the AlwaysOn Global 250 to the seventh annual Summit at Stanford University. One key finding about the AO 250 startups: only 12 companies sold in the year since the previous conference, which is just half the number in each of the three previous years. Tech giants that have picked up AO 250 startups since the last conference include CA Inc, Omniture, Nokia and Hewlett-Packard.

While the number of trade sales declined notably for AO 250 companies, there was a significant pickup in the other exit option, an IPO. Three AO 250 companies managed to make it to the public markets over the past year, creating an aggregate market valuation of some $2.5bn. Those offerings came despite talk about the IPO window being closed. Further, all of them are trading above their issue price even though the broader market has been rather inhospitable lately. The Summit at Stanford opens Tuesday and runs through Thursday afternoon. For more details on the conference, see the event page.

With Data Domain done, what’s next for NetApp?

Brenon Daly

Contact: Brenon Daly, Simon Robinson

Data Domain was originally slated to report second-quarter earnings later this afternoon. Instead, the data de-duplication specialist is done as as an independent company, with the acquisition by EMC for the princely sum of $2.3bn closing today. The deal looks even ‘princelier’ when we consider the markdown M&A that we’ve been seeing recently. In fact, EMC’s bid values Data Domain at 7.4 times its trailing 12-month (TTM) revenue. That’s the richest multiple paid for a US public company since March 2008, when Ansys paid 8.2 times TTM sales for Ansoft.

Assuming the deal does indeed go through as expected, we wonder what will happen with the vendor that originally put Data Domain in play, NetApp. Certainly, the proposed pairing, which was approved by the boards at both firms, would have been a boost for NetApp. The storage system giant could certainly benefit from a midrange de-dupe product to serve customers beyond its existing base, which is precisely what Data Domain would have provided. The head of our storage practice, Simon Robinson, recently speculated that NetApp may well target other de-dupe providers. None of the potential candidates appears to fit as cleanly into NetApp as Data Domain would have, but there are nonetheless cases to be made for both CommVault and ExaGrid Systems.

While CommVault does indeed offer de-dupe technology, its backup software would pose a tricky integration challenge for NetApp, which sells appliances as an alternative to traditional backup software. (Keep in mind, too, that NetApp’s M&A track record hardly inspires confidence.) Meanwhile, ExaGrid is a company that in many ways has shaped itself in the image of Data Domain, albeit while selling de-dupe appliances. Buying ExaGrid wouldn’t bring NetApp the same heft as picking up Data Domain, but it would fit nicely into its focus on the SME market. If nothing else, NetApp could put some of the windfall of the $57m breakup fee that it received from the Data Domain deal toward another de-dupe move.