Tag: M&A

Not ad(d)ing up

-Email Thomas Rasmussen

Contrary to our pronouncement last year, the online advertising industry is in a tough spot at the moment. Venture funding for these companies has been shut off as the slumping demand for Web-based advertising has hit the sector harder than it anticipated. (At least it’s not as bad as the regular advertising market. As one VC quipped recently, “While the online ad market has caught a cold, the offline ad market has caught pneumonia.”) Still, the decline in the space has created numerous opportunities for buyers looking to pick up scraps.

One such company having a field day in the current environment is Adknowledge. Just this week, the company picked up the advertising business of struggling MIVA for the bargain price of $11.6m. The division has estimated trailing 12-month revenue of about $75m, down sharply from $100m a year ago. The acquisition came after Adknowledge tucked in two small social networking ad networks for less than $2m, much less than the more than $4m the two raised in venture capital. Furthermore, Adknowledge, which has raised an estimated $45m, tells us that it is still shopping.

Of course, it’s not all gloom and doom for the online ad market. One area where there’s actual growth – and at least the promise of rising valuations – is in online video advertising. VCs have put hundreds of millions of dollars into this sector. Their bet: More Web surfers will increasingly look to online videos for information and entertainment. Granted, it’s still a small space. (Consider the fact that YouTube probably contributed only a few hundred million dollars of revenue to Google’s total revenue of $21.8bn in 2008.) Still, the promise is there. Also encouraging VCs in this market is that the online ad giants (Google, Microsoft, AOL and so on) may well need to go shopping to get video ad technology. We recently published a more-thorough report on that, matching potential buyers and sellers.

Oracle’s stimulus package

Brenon Daly

Contact: Brenon Daly

One way to read Oracle’s novel announcement on Wednesday that it will start paying a dividend is that after years of handing out money to shareholders of other companies in the form of acquisitions, it will dole out some to its own investors. Word that the software giant will pay a dividend for the first time comes after a quarter in which Oracle acquired just one company, mValent. It was the lowest quarterly total for the company in recent memory, and compares with the shopping spree in the same quarter last year that saw it take home BEA Systems for $8.5bn, among other deals.

Although terms for Oracle’s most-recent acquisition weren’t released, we understand that it paid less than $10m for mValent, a change and configuration management startup. Viewed in light of the announced dividend of a nickel per share, even assuming that Oracle paid $10m for mValent, the purchase price works out to just 4% of the cash that the company is set to return to shareholders next month. (With five billion shares outstanding, Oracle’s dividend bill will be $250m per quarter, or $1bn for the full year.)

Even though time and money can only be spent once (as the saying goes), merely committing to paying a dividend doesn’t necessarily take a company out of the M&A market. Look at Microsoft, which has been a dividend-paying company since the beginning of 2003. It has inked four of its five largest deals even as it handed back billions of dollars to its own shareholders. And that corporate largess has hardly imperiled the Redmond, Washington-based behemoth. It finished last year with more than $20bn in cash and short-term investments on its balance sheet.

Oracle’s M&A, by quarter

Period Deal volume Disclosed and estimated deal value
Fiscal Q3 (December-February) 2009 1 Estimated less than $10m
Fiscal Q2 (September-November) 2008 5 $455m
Fiscal Q1 (June-August) 2008 2 Not disclosed
Fiscal Q4 (March-May) 2008 2 $100m
Fiscal Q3 (December-February) 2008 4 $8.5bn
Note: Oracle’s fiscal year ends in May

Source: The 451 M&A KnowledgeBase

Shopping with St. Patrick

Brenon Daly

Contact: Brenon Daly

Starting in the mid-1990s, Ireland joined the New Economy. The island shifted its economy from a centuries-old farming and manufacturing base into a services-oriented and technology-savvy industry. The historic economic isolation of the island gave way to brisk trade with its fellow European Union countries and beyond. Ireland prospered, with some dubbing the country ‘the Celtic tiger’ – a nod to the nickname for the fast-growing countries in Asia during that same period.

Recently, though, Ireland’s boom time has been slowed by the global recession. However, we would point out that the economic decline in the Emerald Isle has been nowhere near as sharp as in another European island nation that dramatically reinvented itself, Iceland. Of course, it helps to think of Iceland not as a country but as a hedge fund, as financial journalist Michael Lewis wrote recently.

What’s interesting to note on this St. Patrick’s Day is how Ireland’s flourishing tech sector has turned into a shopping center for other companies. Since St. Patrick’s Day last year, there has been more than twice the number of Irish tech companies sold than the number of acquisitions made by Irish tech companies. The gulf in spending by Irish companies compared to spending for Irish companies is even more pronounced. Just something to chew over today, in between bites of corned beef and cabbage.

Emerald Isle M&A

Period Acquisitions by Irish companies, $ total Acquisitions of Irish companies, $ total
March 17, 2008-March 17, 2009 11, $225m 25, $720m

Source: The 451 M&A KnowledgeBase

Are earn-outs cop-outs?

-Contact Thomas Rasmussen and Yulitza Peraza

Despite being derided by some as cop-outs, earn-outs are nonetheless popping up more frequently in deal terms. It used to be that the staggered payments were a way to keep the talent at the acquired company from bailing as soon as the ink was dry on the deal. Now, retention isn’t so much the concern, it’s more valuation. Earn-outs are being used to bridge the increasingly wide gulf between buyer and seller expectations.

So far this year, 18% of deals with an announced value of less than $500m had an earn-out provision, up slightly from 15% for the same period in 2008. However, the additional payments are making up a larger part of potential deal values. The average earn-out amounted to half of the deal value in transactions announced so far this year, compared to just one-third during the same period last year. We would attribute that to the leverage buyers have in the current M&A environment as well as their need to preserve cash.

And, anecdotally, we have been hearing that buyers are using their position to set unrealistic terms (thus avoiding payouts down the road, and preserving more of their cash). Consider the case of Mazu Networks, which sold to Riverbed Technology last month for $25m in cash and a potential $22m earn-out. Combined, the upfront and earn-out payments would have nearly made whole the investors in the Cambridge, Massachusetts-based security company. But a closer look at the terms reveals just how unlikely it is that Mazu and its backers will see much – if any – of that earn-out. The reason? To be paid in full, Mazu will have to more than double its bookings by the end of March next year at a time when the economy is shrinking and even tech stalwarts are struggling to post any revenue growth.

Crossbeam looks to deal

Brenon Daly

Contact: Brenon Daly

After growing organically to $90m in sales in 2008, Crossbeam Systems is actively looking to acquire a company in the near future, the company said Tuesday at the Montgomery Technology Conference. Crossbeam has been generating cash for more than a year, and currently has some $11m in the bank. It also has an untouched $15m line of credit and indicated that it could raise another round of funding for a significant transaction. (Crossbeam has already raised some $105m in venture backing over the past seven years.)

Although Crossbeam is lumped into the security market, it is a platform – rather than an application – vendor. In fact, it partners with several key security companies, including Check Point Software Technologies, Sourcefire and IBM’s ISS unit. Obviously, it couldn’t buy any single security application vendor without risking the loss of one of those partners. Instead, the company is looking to do a network-related deal, perhaps adding analysis or application acceleration. (However, Crossbeam won’t be considering WAN traffic optimization companies; the company said that market is too crowded.)

As it plans to shop, Crossbeam joins several other large privately held companies, which are all running at more than $50m in revenue, that are currently in the market. We understand that Tripwire may be looking to pick up some security technology, specifically in log management and vulnerability assessment. And, we recently noted that NetQoS is also considering a deal. In fact, we hear that the networking company may be close to a letter of intent on a small transaction, while it also continues to assess a much more significant acquisition.

Omniture: the optimistic opportunist

-Contact Thomas Rasmussen

After digesting its $382m double-down acquisition of competitor Visual Sciences last year, Web analytics firm Omniture is bullish on buying. At the Pacific Crest Securities conference last week, the company outlined its M&A strategy, which essentially boils down to one word: opportunistic. It tucked in its struggling competitor Mercado Software for $6.5m in November 2008, adding an estimated $12m to its top line. The company had raised $66m in venture capital over the past 10 years. Omniture told us some of Mercado’s large customers had in fact approached it to do the deal. Moreover, Omniture said its remaining privately held competitors Coremetrics and WebTrends are struggling. The company added that it’s seeing an increasing amount of their customers transition over (some even in mid-contract), and it’s ready to deal, as long as it’s at 2009-type discounts.

Not so fast, say the two firms, which we estimate ring up combined revenue of just south of $200m. WebTrends, which PE shop Francisco Partners took off of NetIQ’s books in 2005 for $94m, says that despite a shakeup in management, the company is well positioned. It cites profitability, consistent quarter-over-quarter growth, its highest revenue quarter in its history last quarter, and says it has no need for further funding from its rich backer. (Reports Thursday indicated that Francisco is set to begin raising a third fund, targeting at least $2bn.) Meanwhile, Coremetrics seems to have overindulged on venture capital, closing a $60m series E round last March, bringing its total raised to date to $111m. We tend to get skeptical when this happens, especially in this environment. However, CEO Joe Davis assured us that having shelved further funding-related expansion plans, the company has the majority of the latest round in the bank. Its January restructuring will return the company to cash-flow neutral this month, and cash-flow positive going forward, and it is on track to grow revenue 20% year over year. The CEO added, “Rumors of my death have been greatly exaggerated by my competitor.”

With more than $80m in cash and short-term investments, its profitable standing and surprisingly upbeat outlook, Omniture can certainly handle a few more tuck-ins. Will it scoop up its feisty rivals? At the moment, it certainly does not look like it. In fact, competitors Coremetrics and WebTrends, which haven’t been in the market since 2006 and 2007, respectively, say they are looking at doing some buying of their own and have the cash to do so.

Omniture M&A

Completed Target Enterprise value Revenue multiple Price per customer
November 2008 Mercado Software $6.5m 0.5x* $32,500*
January 2008 Visual Sciences $382m 5.0x $240,302
December 2007 Offermatica $65m 7.2x* $650,000

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

Startup scrap sales

With new funding difficult to come by, many cash-burning startups are finding that they have no choice but to take a scrap sale. Those desperate deals cut M&A spending on VC-backed startups in the second half of 2008 by nearly three-quarters over the same period in 2007. From July to December last year, 100 venture-backed startups got acquired, for a total bill of just $3bn. That compares to 153 startups sold for a total of $11.1bn during the same period in 2007.

And we’ve seen more of these types of deals so far this year. Oracle, SAP, Barracuda Networks and Quest Software, among other large technology buyers, have all purchased companies for less than the money raised by the startups, according to our estimates. Consider the specific case of Mirage Networks. The network access control (NAC) vendor raised some $40m before discovering that NAC wasn’t really a market after all. (The eight-year-old company generated an estimated $5m in sales last year.) Trustwave picked up Mirage for some $10m, we estimate. Meanwhile, Mazu Networks will have to hit all of its earn-outs to make its investors whole again. About a month ago, Riverbed Technology said that it would pay $25m upfront for the network security vendor, with a possible $22m earn-out. That’s actually not a bad outcome for unprofitable Mazu, which we understand was burning about $1m each quarter. And yesterday, Netezza picked up the assets of data-auditing and protection vendor Tizor Systems for $3.1m; Tizor had raised $26m from investors.

VC-backed tech startups M&A

Month 2007 deal volume 2007 deal value 2008 deal volume 2008 deal value
July 23 $2.3bn 21 $994m
August 18 $1.2bn 16 $497m
September 25 $1.7bn 16 $642m
October 39 $2bn 13 $487m
November 27 $3.1bn 20 $346m
December 21 $788m 14 $56m
Total 153 $11.1bn 100 $3bn

Source: The 451 M&A KnowledgeBase

Cisco: not a common-sense shopper

Brenon Daly

Contact: Brenon Daly

Through both direct and indirect cues, Cisco Systems’ John Chambers has created the impression that he’s about set to start wheeling a shopping cart up and down the Valley, grabbing technology companies with abandon. Folks who anticipate a dramatic return of Cisco to the M&A market have been busy putting together a shopping list for the company. (As has been well reported, the networking giant has plenty of pocket money; it current holds some $29bn of cash, and just raised another $4bn by selling bonds.) Most of the names on the list are ones that have been kicked around for some time.

For instance, fast-growing Riverbed Technology tops the list for some people. Indeed, Chambers approached the WAN traffic optimizer at least twice before the company went public in 2006, according to a source. We understand that talks ended with Riverbed feeling rather disenchanted with the giant. Other speculation centers on Cisco making a large virtualization play, either reaching for Citrix or VMware. The thinking on the latter is that Cisco would actually buy EMC, which sports an enterprise value of $21bn, to get its hands on the virtualization subsidiary. And last year we added another name to the mix, reporting that Cisco may have eyes for security vendor McAfee.

There’s a certain amount of logic to all of the potential acquisition candidates. At the least, speculation about them is defensible since they are all rooted in common sense. The only hook is that Cisco isn’t a ‘common-sense’ shopper. That’s not to say it isn’t an effective acquirer. Cisco very much is a smart shopper, and we’d put its recent record up there with any other tech company. What we mean is that Cisco’s deals are anything but predictable.

For instance, Cisco was selling exclusively to enterprises when it did an about-face nearly six years ago and shelled out $500m in stock for home networking equipment vendor Linksys. And it got further into the home when it followed that up with its largest post-Bubble purchase, the late-2005 acquisition of Scientific-Atlanta for $6.9bn. (Although word of the deal for the set-top box maker leaked out, few people would have initially put the two companies together.) Similarly, WebEx Communications wasn’t on any of the Cisco shortlists that we saw before the company pulled the trigger on its $3.2bn purchase of the Web conferencing vendor. But what do we know? Maybe some folks out there not only called one or two of those deals, but also hit the unlikely trifecta. If so, maybe you could email us to let us know – and while you’re at it, could you pass along some numbers for lottery picks?

Seven down, five to go for VeriSign

-Contact Thomas Rasmussen

After accounting for a dime of every dollar spent on M&A in 2008, divestitures appear likely to be a thriving business again in 2009. They accounted for 11% of the total M&A spending last year, up from 7% in 2007. And respondents to our annual Corpdev Outlook Survey said they were twice as likely to expect the pace of divestitures to increase than decrease this year. This is especially true for larger companies, some of which have overindulged on M&A throughout the years.

In the world of tech divestitures, there is no better example of this than VeriSign. The naming and encryption giant has been working toward selling off billions of dollars worth of properties that ousted CEO Stratton Sclavos picked up during his multiyear shopping spree. The company announced its first divestiture of 2009 last week, the sale of its European messaging division 3united mobile Solutions. That move follows the sale of its remaining stake in Jamba in October 2008 and the divestiture of its inCode communications and post-pay billing divisions in November and December, respectively.

For those of you keeping score, VeriSign has now completed seven deals, with five still to go. But as is becoming grudgingly apparent to the company and many others in the same position, this is easier said than done. The current economic environment is not exactly ideal for divestitures or spinoffs. And shedding the remaining parts, especially its bloated communications and messaging divisions, has proven to be quite a challenge for the company since they most likely command a much higher price tag, likely in the hundreds of millions of dollars. VeriSign says there are strategic buyers, but the closed credit market and general economic anxiety are severely hampering potential deals.

A chronicle of VeriSign’s seven divestitures

Date Acquirer Unit Note
February 2009 Sinon Invest Holding 3united Mobile Solutions Acquired for $66m in 2006
December 2008 Convergys Post-pay billing business
November 2008 Management buyout inCode Wireless Acquired for $52m in 2006
May 2008 MK Capital Kontiki Acquired for $58m in 2006
April 2008 Melbourne IT Digital Brand Management Services business Sold for $50m
April 2008 Globys Self-care and analytics business
June 2007 Sedo.com GreatDomains.com business

Source: The 451 M&A KnowledgeBase

AVX looking to buy again

Brenon Daly

Contact: Brenon Daly

A year and a half after inking the largest deal in its history, electronic components maker AVX is mulling a return to the market. CEO John Gilbertson told investors at the Thomas Weisel Partners Technology Conference on Monday that he’s considering acquisitions that would bolster the company’s specialty business, including defense, medical or aerospace. Gilbertson added that any deal would be small, likely in the range of $30-50m.

The CEO also said he wouldn’t be paying anywhere close to the multiple he paid in AVX’s largest deal, the $231m all-cash purchase of American Technical Ceramics (ATC) in June 2007. In that transaction, AVX paid 2.6x trailing 12-month revenue for ATC, in part because it had to outbid at least three other parties. (Thomas Weisel banked ATC.)

Since announcing that acquisition, shares of AVX – a dividend-paying company that is majority owned by Kyocera – have lost 40% of their value. The company currently has no debt, with $527m in cash and equivalents, and sports an enterprise value of about $1bn. That’s just 0.6x the $1.6bn in sales that AVX recorded in 2008. Gilbertson said that’s more the valuation he’d expect to pay in any deal he’d do these days.