Tag: M&A

Revenue refresh through M&A

Brenon Daly

Contact: Brenon Daly

Having recently lost several key Asian customers in the brutally competitive digital TV market, Trident Microsystems went shopping in Europe last week to rebuild its top line. On its trip, Trident got a pretty good bargain. It will hand over some seven million shares, valued at roughly $10.3m, to Switzerland’s Micronas Semiconductor for three consumer product lines. We understand that the three units were generating more than $100m a year in sales.

The purchase comes at a crucial time for Trident. Revenue at the company has plummeted from $258m in the past fiscal year, which ended last June. With two quarters and guidance for the third quarter already in the books, revenue at Trident has totaled just $61m. That implies sales for the current fiscal year could well be just one-quarter the previous fiscal year’s figure. Along the way, Trident has slipped from a profitable business to a cash-burning one. Its difficulties haven’t been lost on Wall Street, which values the debt-free vendor at about $100m, just half its current cash level.

Trident’s pending pickup of the three Micronas units should help, both on the top and bottom lines. (Union Square Advisors worked with Trident while Micronas went with hometown bank Credit Suisse Securities.) The company indicated that the acquisition should put revenue at $35m for the quarter that ends in September, essentially matching the previous year’s level. More importantly, the combination will boost Trident’s earnings from the very start and slow its cash burn. The firm will have more to say about the deal, which will dramatically expand its portfolio and end markets, when it reports fiscal third-quarter earnings later this month. Meanwhile, we would note that Trident shares are slightly above where they were when the vendor announced the acquisition

WDC goes SSD

-Contact Thomas Rasmussen

The market for solid-state-drive (SSD) technology is heating up. As an increasing number of consumer and enterprise products (including servers, desktops, laptops and netbooks) incorporate the technology, some old-line technology companies are looking to expand their SSD offerings. Western Digital acknowledged that last week by acquiring SSD vendor SiliconSystems for $65m in cash after about a year of on-and-off talks. (It was Western Digital’s first purchase since its $1.14bn acquisition of Komag in mid-2007.) On the other side, SiliconSystems had taken in just $14m in venture capital since its inception in 2002 from Miramar Venture Partners, Rustic Canyon Partners, Samsung Ventures America, Shepherd Ventures and SanDisk.

We understand that SiliconSystems generated about $50m in trailing 12-month (TTM) sales, meaning Western Digital paid about 1.3x TTM sales for the startup. This is in line with historical averages for the space, but comes at a time when the median valuation for venture-backed startups has been nearly cut in half. In the first quarter of 2009, the median valuation in a sale for a VC-backed tech company sank to just 2.1x TTM sales, compared to 3.8x TTM sales during the same period last year. (See our full report on first-quarter M&A.)

SiliconSystems will be re-branded as Western Digital’s Solid-State Storage business unit and will be headed by former CEO Michael Hajeck, who used to run STEC Inc’s enterprise SSD division. The importance of this relatively small acquisition should not be underestimated. Having essentially become a player in the SSD space overnight, Western Digital has taken the first step toward securing its future survival. With $1.4bn in cash, we wonder if Western Digital will continue to use acquisitions to expand in this market. Possible targets are Hajeck’s former employer STEC, which we previously speculated might be on sale, as well as Smart Modular Technologies. There are also a few potentially disruptive startups out there worth looking at such as Pliant Technology, Texas Memory Systems and Fusion-io.

Western Digital M&A

Date announced Target Enterprise value Price to sales multiple
March 30, 2009 SiliconSystems $65m 1.3x*
June 28, 2007 Komag $1.14bn 1.1x
July 24, 2003 Read-Rite $172m 1.0x

Source: The 451 M&A KnowledgeBase *451 Group estimate

IBM-Sun: Nothing but March madness?

Brenon Daly

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.

Tough exits for VCs

Brenon Daly

Contact: Brenon Daly, Thomas Rasmussen

After being frozen for more than six months, there were some signs of a thaw this week in the tech IPO market. Chinese game maker Changyou.com enjoyed a strong debut on Thursday, and only inched down slightly in the following session. In addition, language software maker Rosetta Stone set the terms of its planned offering earlier in the week.

While the offerings are encouraging from a capital markets perspective, the same can’t be said for the VC community. The IPOs of Changyou.com and Rosetta Stone won’t mean a payoff for any of the Sand Hill Road crowd. (Changyou.com is a spinoff from online portal Soho, while Rosetta Stone counts a pair of buyout shops as its majority owners.) Of course, VCs have long since given up on betting on IPOs to boost their returns. Most acknowledge that for every portfolio company that does make it onto the public market, nearly 10 startups will get snapped up in a trade sale.

Unfortunately, there’s bad news on the M&A front, as well. My colleague Thomas Rasmussen calculated that the median valuation in the sale of VC-backed companies in the first quarter of 2009 slumped to 2.1x trailing 12-month (TTM) sales, compared to 3.8x TTM sales during the same period last year. Granted, that multiple was about twice as rich as first-quarter sales of non-VC-backed companies. But we would be quick to add that the 2.1x TTM sales multiple essentially matches the level for non-VC-backed startups in the first quarter of 2008. For more on first-quarter valuations and overall deal flow, see our first-quarter M&A report.

Buyers’ strike

Brenon Daly

Contact: Brenon Daly

When the Nasdaq was on an uninterrupted slide from early February to early March, market pundits talked about a ‘buyers’ strike’ by investors. (The month-long decline, which erased some 20% from the index, sank the Nasdaq close to levels not seen since the tech industry was emerging from the wreck in 2002. It has since rebounded above month-ago levels.) Apparently, that buyers’ strike also carried over to the companies’ M&A plans during the first three months of the year.

Publicly traded tech companies inked just 119 deals, which is half the level as the same quarter in 2008. The decline in spending is even more pronounced: In the first quarter, US public companies announced a grand total of just $3.2bn, which is one-tenth the level ($39.4bn) during the same period last year. We would note that even typically busy tech buyers such as Symantec, Citrix, Google and Hewlett-Packard all sat out the first quarter. And many of the big tech shoppers that did announce transactions just picked up assets from startups. Among the buyers of wind-downs were Netezza, SAP, EMC and Quest Software.

Combine the reluctance of corporate buyers with the disappearance of financial acquirers, and it’s no wonder tech M&A plunged to a record low in the quarter. As we recently noted, spending on deals plunged 85% quarter over quarter to just $8bn. Look for our full report on first-quarter tech M&A in tonight’s sendout.

Q1 M&A: Recession hits deal-making

Brenon Daly

Contact: Brenon Daly

We’ve just finished tallying the first-quarter tech M&A numbers, and the picture is pretty bleak. In the first three months of the year, there were just 625 tech and telecom transactions, with total spending in the quarter hitting a mere $8bn. Compared to the first quarter of 2008, the number of deals dropped by about one-quarter, while spending plummeted 85%.

The main reason for the sharp decline in spending is the disappearance of big deals. In fact, for the first time in the seven years we’ve kept records on tech M&A, buyers didn’t announce a single transaction worth more than $1bn during the quarter. During 2006 and 2007, we saw an average of about 18 deals announced each quarter that were valued at more than $1bn. Even last year, when the current recession began to be felt, we still saw an average of some nine billion-dollar-plus deals each quarter. (However, on Wednesday, which is the first day of the second quarter, Fidelity National Information Services said it would acquire Metavante for almost $3bn in an all-stock deal.) The largest single transaction in the first quarter was Autonomy Corp’s $775m purchase of Interwoven.

Projecting annual totals from a single quarter is hardly an accurate way to predict deal flow, particularly in a lumpy business like M&A. (The Fidelity National-Metavante transaction underscores that.) Nonetheless, we would note that right now, 2009 is on track to post the lowest deal spending totals since the Internet bubble burst. The current low-water mark was hit in 2003, when spending totaled just $61bn. Since then, tech M&A has boomed, with spending in each of the past four years topping $300bn. But the way it looks now, 2009 is shaping up as a year when we could very well measure annual tech M&A spending in the tens of billions of dollars, rather than hundreds of billions of dollars. We’ll have a full report on first-quarter M&A on Thursday.

Quarter-by-quarter M&A totals

Period Deal volume Deal value
Q1 2009 625 $8bn
Q4 2008 721 $40.7bn
Q3 2008 733 $32.2bn
Q2 2008 716 $173.2bn
Q1 2008 835 $55.2bn

Source: The 451 M&A KnowledgeBase

Will mobile payment startups pay off?

-Contact Thomas Rasmussen, Chris Hazelton

In 2006 and 2007, mobile payment startups were a favorite among venture capitalists. The promise of dethroning the credit card companies by bypassing them had VCs and strategic investors throwing hundreds of millions of dollars after such startups. During this time, a few lucky vendors managed to secure lucrative exits. Among other deals, Firethorn, a company backed with just $14m, sold to Qualcomm for $210m and 3united Mobile Solutions was rolled up for $70m as part of VeriSign’s acquisition spree. Recent prices, however, haven’t been anywhere near as rich. Consider this: VeriSign unwound its 3united purchase last month, pocketing what we understand was about $5m. Similarly, Sybase picked up PayBox Solution for just $11.4m, while Kushcash and other promising mobile payment startups have quietly closed their doors.

Last week, Belgian phone company Belgacom took a 40% stake in mobile payment provider Tunz. Tunz has taken in a relatively small $4m in funding since launching in 2007, but with VCs sidelined, we believe this investment was a strategic cash infusion to keep alive the company behind Belgacom’s mobile payment strategy. It may well be a prelude to an outright acquisition. With valuations clearly deflated and venture capitalists nowhere to be seen, we believe mobile service providers are set to go shopping for payment companies. Who might be next?

Yodlee, mFoundry and Obopay are three companies that have made a name for themselves in the world of mobile banking and payments. Each has secured deals with the major banks and wireless companies, but still lacks scale. Further, all of them are facing increased competition from deep-pocketed and patient rivals such as Amazon, eBay’s PayPal and Google’s CheckOut. Still, we believe they are attractive targets for wireless carriers or mobile device makers, who are increasingly on the lookout for additional revenue streams.

In fact, Obopay received a large investment from Nokia last week as part of its $70m series E funding round. Nokia’s portion is unclear, but Obopay tells us the stake gives Nokia a seat on its board. (Additionally, we would note that this investment comes directly from Nokia, rather than its venture arm, Nokia Growth Partners, as has typically been the case). This latest round brings Obopay’s total funding to just shy of $150m. Although we wonder about the potential return for Obopay’s backers in a trade sale to Nokia, the mobile payment vendor would clearly be a great complement to Nokia’s growing Ovi suite of mobile services. (We would also note that Qualcomm put money into Obopay and considered acquiring the company, but instead went with Firethorn.) Likewise, Yodlee and mFoundry’s roster of strategic investors and customers reads like a short list of potential buyers: Motorola, PayPal, Alltel (now Verizon), along with other large banks and wireless providers. Yodlee says it has raised more than $100m throughout its 10-year history, and mFoundry has reportedly raised about $25m.

Back-of-the-envelope thinking on Red Hat-Oracle

Brenon Daly

Contact: Brenon Daly

If Oracle was seriously planning a bid for Red Hat (and we have our doubts about such a pairing), then Larry Ellison had better be prepared to reach deeper into his pocket. Following Red Hat’s solid fiscal fourth-quarter report, shares of the Linux giant jumped 17% to $17.60 on Thursday. That added about a half-billion dollars to Red Hat’s price tag, with the company now sporting a fully diluted equity value of some $3.5bn.

Looking back at the nine US public companies that Oracle has acquired this decade, we would note that Oracle has paid an average premium of 14% above the previous day’s closing price at the target company. (Note: We excluded the two-year-long saga around PeopleSoft.) If we apply that premium, which we acknowledge is crudely calculated, to Red Hat, the company’s equity value swells to $4bn, or about $21 per share. That’s essentially where Red Hat shares changed hands in August, before Wall Street imploded.

On the other side of the table, Red Hat recently cleaned up its balance sheet, which certainly makes it a more palatable target. (Again, we don’t think the company is in play, much less took the steps to catch Oracle’s eye. More so, that it was just good fiscal practice.) Specifically, Red Hat paid off all of its debt and finished its fiscal year, which ended last month, with $663m in cash and short-term investments. That would be a nice ‘rebate’ for any potential buyer, in the unlikely event that Ellison or anyone else reaches for Red Hat.

Bulging boutiques

Brenon Daly

Contact: Brenon Daly

In our league tables report, we noted that some 143 firms advised on at least one technology transaction in 2008. That was down slightly from the 153 firms we tallied in 2007, even as the number of tech transactions dipped about 17% year over year. Obviously, some of that decline can be chalked up to the investment banks that dramatically and abruptly disappeared in the last year. But more so, the thinning ranks of investment banks can be attributed to the fact that deal flow is drying up.

So far this year, the number of deals announced has fallen about one-quarter to just 574. (And don’t even ask about M&A spending, which has plummeted to just $7bn from $49bn during the same period last year.) That, combined with the fact that fees are increasingly coming under pressure, has meant much leaner times for the advisory business in general. So far, the impact of that has primarily been felt by the bulge-bracket banks, which have made sharp cuts in their ranks since September.

This has sparked a flow of talent from big shops to small. Earlier this week, for instance, a pair of former Bear Stearns bankers founded their own tech advisory firm, Stone Key Partners. We expect many more of the dislocated bulge-bracket bankers to follow suit and hang out shingles of their own. In the meantime, many bankers have joined boutiques of various sizes. Since Wall Street imploded in mid-September, boutique firms including Revolution Partners, America’s Growth Capital, Perella Weinberg Partners, Evercore Partners and Redwood Capital have all picked up former bulge-bracket bankers.

And there are additional moves we’ve heard about but have yet to be announced. We understand that Goldman Sachs’ software banker, Ian Macleod, is set to join Qatalyst Partners, the San Francisco-based firm launched by Frank Quattrone a year ago. We also heard recently that Richard Vieira, who worked a number of open source transactions at Jefferies & Co before leaving some two years ago, has resurfaced. Vieira is joining Shea & Company, a three-man shop founded in 2005 by JP Morgan Securities’ former head of software banking, Michael Shea.

Cisco ‘papers’ purchase of Pure Digital

Brenon Daly

Contact: Brenon Daly

When we wrote recently that Cisco Systems was an unpredictable acquirer, we only covered half of it. Who would have thought (prior to rumors and subsequent official word last Thursday) that Cisco really wanted to buy its way into the consumer electronics market? Much less that the company wanted to enter that space so badly that it would pay what looks a lot more like a 2007 valuation than a 2009 valuation?

We’re referring, of course, to the networking giant’s acquisition last week of Flip camcorder maker Pure Digital Technologies for $590m. As for the valuation, we understand that Pure Digital wrapped up last year with sales of $150m, meaning Cisco paid about four times trailing 12-month sales for the company. Of course, Pure Digital was growing quickly, but we would still note that its valuation is about twice as rich as Cisco’s current valuation. (There were no bankers on either side of deal, we’ve been told.)

The concern about Cisco’s valuation is more than an academic issue for Pure Digital. After all, it took payment in Cisco shares, rather than cash. And that’s the other part of Cisco’s unpredictability. According to our records, the Pure Digital purchase was the first time Cisco has used its equity to acquire a company in more than four years. (The last time Cisco did a paper deal was its $450m pickup of wireless LAN switch vendor Airespace in January 2005.)

Since then, Cisco has inked some 42 transactions with a disclosed deal value of $13.4bn. And of course, the company still has its well-reported $29bn in cash on hand. That level won’t change due to Pure Digital. We can only speculate why Pure Digital’s backers chose to take Cisco stock rather than cash in this economic environment. But we would note that this isn’t the first time that one of Pure Digital’s backers has taken a slug of Cisco equity. Way back in 1987, Sequoia Capital’s founder Don Valentine put money into Cisco.