Tag: M&A

Corporate dealmakers ready to deal

Brenon Daly

Contact: Brenon Daly

Companies expect to be busier with M&A during the rest of the year than they’ve been so far in 2009, even though they’re likely to pay steeper prices for their deals. That’s the takeaway from our recent survey of corporate development executives at more than 60 technology firms. The survey, which closed Monday evening, updated our full report from last December and will figure into our midyear M&A webinar on Thursday.

If not bullish, the projections in our midyear survey are much less bearish than they were in our previous survey at the end of last year. Six out of 10 respondents said their companies will pick up their rate of shopping, while just one out of 10 projected their M&A pace will tail off for the rest of 2009. That’s a notable swing back to optimism from the December survey, when just four out of 10 said they expected to be busier, and two out of 10 said they would slow their acquisition pace.

The view from corporate dealmakers is significant because, collectively, they set the tone in the tech M&A market. So far this year, strategic buyers have accounted for $50bn of the $53bn in announced deal values, with financial acquirers tallying just $3bn. In terms of how they assess the buying environment, however, the view is pretty evenly split. Roughly one-third of the respondents said valuations of private technology companies would fall further in the second half of 2009, with another one-third saying they would hold steady, and another one-third predicting they would rebound before the end of the year.

What’s the outlook for mobile payment startups?

-Contact Thomas Rasmussen

The consolidation in the mobile payment market that we outlined recently is still on. Startup Boku announced on Tuesday a $13m venture capital infusion in the form of what we understand was a $3m series A round followed quickly by a $10m series B round a little over a month later. Benchmark Capital led the latest round, with Index Ventures and Khosla Ventures also pitching in some cash. The money was used to acquire two competitors, Paymo and Mobillcash. We estimate that very little of the cash was used to buy the vendors. We understand that the purchase of Paymo, which raised a reported $5m itself, was primarily done in stock. The deals were largely a way for Boku to gain customers and technology, as well as expand its international reach. It’s increasingly important for mobile payment startups to do something to stand out among the dozens of rivals also trying to crack this market. What’s unusual about Boku is that this strategy is playing out so quickly. The company only incorporated in March.

The real question for Boku and other promising startups in the mobile payment space such as RFinity is what will ultimately happen to this hyped market. Despite hundreds of millions of dollars poured into startups, they haven’t been able to generate much revenue, certainly not to the level that would make them viable businesses at this point. We believe the best outcome for these firms is an exit to a larger strategic acquirer. An example of this that may well be in the offing is Obopay, which took an investment from Nokia a few months ago. We suspect that could be a ‘try before you buy’ arrangement for the Finnish mobile company. Research in Motion and others could look to use acquisitions to catch up, as well.

However, we wonder how long it will be before other smartphone providers, platforms and mobile operators do as Apple has done. Micro-transactions are a huge selling point for the new iPhone 3.0 update and, frankly, one of the few bright spots for the mobile payment sector. However, all transactions for iPhone applications are done through Apple itself, leaving companies such as Boku out in the cold. If other vendors – including RIM, Palm Inc, Google, Microsoft and even application platforms like Facebook – stay in-house to develop the technology, there isn’t much need to go shopping. That could well hurt the valuations of mobile payment startups, even those that survive this current period of consolidation.

Quick to offer, slow to vote

Brenon Daly

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.

Intuit-PayCycle: A kind of homecoming

Brenon Daly

by Brenon Daly

Looking at Intuit’s acquisition of PayCycle Inc, we might note that the alumni network can pay off – and pay off big. Intuit picked up the payroll services startup earlier this week for $170m in cash. We understand that PayCycle generated only about $30m over the previous four quarters, meaning Intuit paid an estimated 5.7x sales. (Granted, by looking solely at revenue, we’re arguably shortchanging PayCycle. The company, which has some 85,000 customers, sells its payroll services on a subscription basis, meaning revenue substantially lags actual contracts it has billed.) In a somewhat unusual mandate, Goldman Sachs advised Intuit, while Lane, Berry & Co., now owned by Raymond James & Associates, advised PayCycle.

There are a number of connections between Intuit and PayCycle. The Palo Alto, California-based startup was founded by a pair of former Intuit executives (Martin Gates and Rene Lacerte) who then turned the company over to Jim Heeger, Intuit’s former chief financial officer. Also, board member David Hornik of August Capital formerly drew a paycheck from Intuit, as did fellow investor Tom Blaisdell of DCM.

Is Dell in the market for a GlassHouse?

Brenon Daly

Contact: Brenon Daly, Simon Robinson

After getting its M&A machine revving in the second half of 2007, Dell largely unplugged it after that. It has inked just three deals over the past year and a half, and only one of those has been significant. In February 2008, Dell spent $155m for email-archiving company MessageOne, in a transaction that was a bit of a family affair. The other two buys: a $12m play for a consulting shop and a tiny amount for a Web address to help sell its Adamo line of laptops.

And now, Dell’s efforts to bring in a new executive to do deals for the company have gotten hung up. David Johnson, formerly IBM’s top dealmaker, had been tapped to take over that role at Dell. However, Big Blue sued Johnson, saying the move to Dell would violate the terms of his employment agreement. (Meanwhile, back in Armonk, New York, Cosmo Nista, who had worked corporate development for IBM’s hardware division, has been named acting head of M&A at the company, replacing Johnson, according to one source.)

If Dell is looking to do a deal, our research director for storage, Simon Robinson, has come up with a pretty solid nomination: GlassHouse Technologies. The IT infrastructure services vendor pulled its IPO paperwork in March and recently indicated that it may do some shopping of its own. However, if GlassHouse were to go to the other side of a transaction, it could very well be in a sale to Dell, which is already an investor in GlassHouse as well as being its largest partner. And strategically, the services offered by GlassHouse would fit nicely with Dell’s effort to become a larger supplier of servers and storage to its enterprise customers.

Auction action

Brenon Daly

Contact: Brenon Daly

With one bidding war over a Nasdaq-traded company wrapped up last week, two new skirmishes broke out on Monday. Both Borland and MathStar received conditional offers of higher prices than had previously been floated for the companies. The bid-and-raise process at both these otherwise-neglected companies indicates the M&A market has recovered notably from its low point earlier this year.

In the larger of the two transactions, Borland said in a proxy filed in support of its existing agreement to sell to Micro Focus that it has received a nonbinding ‘expression of interest’ from an unnamed buyout shop. The offer – which is conditional on the firm completing due diligence on the application lifecycle management software vendor – has the firm paying $1.20 for each share of Borland. That tops Micro Focus’ offer in early May of $1 for each share of Borland.

Micro Focus’ bid, which has been blessed by the boards of both companies, came after it first showed interest in picking up Borland in July 2007, according to the proxy. Meanwhile, the proxy indicated that the unnamed financial acquirer only contacted Borland on May 21 of this year. The buyout firm added that due diligence would take about two weeks, and that its offer was not conditional on financing. Borland said in the proxy that it has opened its books to the unnamed suitor.

Meanwhile, after being in play for more than a half a year, MathStar attracted the interest of Tiberius Capital, a Chicago-based fund that offered to buy half of the company at $1.15 per share. That tops an existing offer of $1.04 for each MathStar share from another company. We would note both of these deals come after a seven-week bidding war over SumTotal Systems, which saw the final price soar 50% above the opening bid.

Buying back stock, rather than buying up companies

Brenon Daly

Contact: Brenon Daly

For a risk-averse company like IBM, it’s always preferable to buy a known than an unknown. At least that’s one way to read its decision to pass on taking home Sun Microsystems at any cost and instead put its money toward repurchasing a slug of its own equity. The recently announced $3bn buyback works out to just under half the amount that Big Blue was reported to have been ready to hand over for Sun.

That’s a fundamentally sound – if conservative – allocation of capital for IBM, a dividend-paying member of the Dow Jones Industrial Average. Nonetheless, it didn’t stop Sun’s winning suitor, Oracle, from tweaking Big Blue, saying it only got involved after IBM ‘failed’ to close the deal. For the record, we would note that since the ‘failure,’ IBM shares have moved higher while Oracle stock is essentially flat with where it was when the acquirer announced its bid. Of course, that verdict is based on just three weeks of trading.

IBM isn’t the only firm spending cash on its own shares rather than the equity of other vendors. Citrix, which hasn’t announced an acquisition in more than a half-year, recently said it plans to buy back some $300m of stock. Even when Citrix does do deals these days, they tend to be tiny purchases. Since acquiring XenSource in August 2007, Citrix has made just four small technology plays. We would chalk that up to the fact that Wall Street has been underwhelmed with Citrix’s purchase of XenSource, its largest-ever deal. And that doesn’t appear likely to change. At last week’s Synergy 2009 conference, Citrix barely mentioned M&A.

Will OpenTable’s IPO lead to M&A?

-Email Thomas Rasmussen

Just three months after filing its initial IPO paperwork, OpenTable set the terms of its $46m offering last week. At the high point of the $12-14 range for its shares, the company would sport a valuation just shy of $300m, or about 6x trailing 12-month (TTM) revenue and 50x TTM EBITDA. For the past three years, OpenTable has grown revenue at a compound annual rate of about 43%. Despite skepticism about the IPO market and OpenTable’s prospects during a period when its primary customers (restaurants) are struggling, the online restaurant reservations service should debut on the Nasdaq under the ticker ‘OPEN’ in the next week or two. OpenTable’s offering comes as Solarwinds is also slated to go public, after its prospectus aged for more than a year.

OpenTable has not disclosed how it will allocate the funds that it will raise in its offering. However, we believe it might be gearing up to make its first foray into M&A. One indication: the presence of Allen & Co as one of OpenTable’s four underwriters. Sure it had a hand in Google’s IPO, but Allen & Co is certainly known more as a media banker than a tech underwriter. OpenTable’s offering is being led by Merrill Lynch, with ThinkEquity and Stifel Nicolaus also on the ticket.

If OpenTable were to shop, we suspect it could well look to bolster its international operations. Since 2004, the San Francisco-based company has sunk millions of dollars into expanding outside the US, but has little to show for it. Its international business, which is burning money, accounts for just 5% of total sales. (The vendor recently pulled out of Germany and France.) We see a parallel between what OpenTable has run into in its unsuccessful international expansion and the early woes that its rich Web services cousin eBay experienced in trying to translate its business outside of its home market. After struggling to address foreign markets by just expanding its existing online auction service, eBay has been picking up local foreign sites that fit the nuances of business and culture in those markets. Ebay has spent billions of dollars lately buying its way into foreign markets.

SGI lives on, as Rackable closes deal and takes name

Brenon Daly

Contact: John Abbott

Rackable Systems has won approval from the bankruptcy courts to acquire Silicon Graphics Inc for $42.5m in cash, as other potential bidders passed on the one-time tech stalwart. And, just as Tera Computer did when it bought the much-better-known Cray in 2000, Rackable has opted to take on the Silicon Graphics name and branding. Rackable Systems becomes Silicon Graphics International, and the brand will be SGI. The Rackable name will survive only as a product moniker.

The higher price – the original offer was just $25m – now includes the equity of SGI’s international subsidiaries and federal systems businesses. The combined companies will have 5,000 customers and 1,350 employees worldwide, though the headcount is expected to shrink fairly rapidly to 1,250. The headquarters will stay in Rackable’s hometown of Fremont, California. Rackable’s current president and CEO Mark Barrenechea will hold the same roles and the board of directors will remain unchanged. However, some SGI executives will join the new management team, including Diane Gibson (senior VP of operations), Eng Lim Goh (senior VP and chief technical officer) and Robert Pette (VP of visualization).

Target customers are medium- and large-scale datacenters and high-performance computing (HPC) firms with Rackable’s x86 cluster compute systems, shared memory clusters, modular systems, storage products, data management software, HPC tools and visualization software. However, Rackable will have to work hard in the current economic climate. While sales were up slightly from the previous quarter, the company’s just-released first-quarter figures showed a year-over-year revenue decline of 34.5% to $44.3m and a loss of $13.4m.

What’s the return on Borland’s M&A?

Brenon Daly

Contact: Brenon Daly

Looking a bit closer at Micro Focus’ $75m acquisition earlier this week of Borland Software, my colleague John Abbott noted that the British company was essentially picking up the Segue Software business that Borland itself bought three years ago. Borland paid $100m, or an enterprise value (EV) of $86m, for the testing and quality assurance tools vendor, which worked out to about 2.3x EV/trailing 12-month (TTM) sales. The purchase of Segue in February 2006 came as part of a larger overhaul of its business, which included Borland ditching its developer tools division.

Fast-forward three years, and Segue is being valued by Micro Focus at just 80% of the amount that Borland paid for it. If we look at Borland’s overall EV of just $67m, the contrast is even starker. Micro Focus is paying a mere 0.7x EV/TTM sales for Borland, which is just one-third the multiple that Borland shelled out for Segue. This isn’t to pick on Borland or knock it for agreeing to sell itself for $1 per share, which is probably as good an outcome as it could have hoped for.

However, the valuation gap does highlight a larger problem in realizing value through M&A. Consider that since 2002, Borland – under various chief executives – has spent more than $300m on nearly a dozen deals. And yet, when all of the firm’s dealmaking was priced by another market participant (in this case, Micro Focus), the aggregate value was actually two-thirds lower. Granted, Borland was shopping in a different time than our current recession, which has obviously pushed valuations down these days. (And the valuation decline is nowhere near as drastic as we’ve seen elsewhere in the market, such as the bankruptcy of Nortel Networks, a company that was once worth more than $200bn.) Still, it’s always worth noting the price a company pays when it buys and the price it gets when it ultimately sells.

Select Borland acquisitions

Date Target Equity value
February 2006 Segue Software $100m
October 2002 TogetherSoft $185m
October 2002 Starbase $24m

Source: The 451 M&A KnowledgeBase