Tag: M&A

Companies go bargain-hunting

Brenon Daly

Contact: Brenon Daly

It’s a buyer’s market in tech M&A right now, and the buyers are saying they want to do deals but don’t want to pay much. That’s the takeaway from our annual survey of corporate development officials. (We’ll have a full report on the results in tonight’s 451 Group send-out.) Half of the respondents said the M&A climate would get ‘somewhat better’ for them in 2009, with another one-quarter saying it would get ‘significantly better.’

The percentage this year (75%) compares to less than half (43%) who predicted last year that the environment would improve. More than four out of 10 corporate development officials projected that the pace of their company’s dealmaking would pick up in 2009, with three out of 10 saying it would stay the same. As to what will make the environment better for them this year, the short answer is that they don’t expect to pay much. Some 45% said valuations of VC-backed companies would ‘decline substantially,’ with another 42% predicting that valuations would ‘decline somewhat.’ That’s nearly three times as many respondents who projected any decline in startup valuations in 2007. Again, we’ll have a full report on the survey tonight.

Outlook for corporate buyers

Year Improve Unchanged Worsen
2008 (for 2009) 75% 13% 12%
2007 (for 2008) 43% 35% 22%

Source: The 451 Corporate Development Outlook Survey, December 2008

Where did you go, LBO?

Brenon Daly

Contact: Brenon Daly

We finished counting all of the nickels and dimes from last year’s M&A spending and, as expected, we’re looking at a rather paltry total. Overall, acquirers across the globe announced tech deals worth $302bn in 2008, down 30% from the total in 2007. (We explore the reasons for the decline – and what it will mean for dealmaking this year – more fully in our 2009 M&A Outlook.)

Perhaps the most interesting point about M&A last year, which goes a long way toward explaining the one-third decline, is the fact that we saw a sharp contrast in the dealmaking activity of strategic and financial acquirers. For the most part, corporate shoppers continued to buy, with the number of dollars spent dropping ‘just’ 12% from the previous year.

On the other hand, PE shops slashed their dealmaking by 77%, spending roughly the same amount on tech LBOs last year that they did in 2004. And given the state of the current credit market – along with some of the painfully ill-advised bets they made on portfolio companies when the markets were smiling – we can’t imagine that situation will unwind enough to spur much activity in tech LBOs in 2009. Indeed, nearly nine out of 10 corporate development officers we surveyed in mid-December said they expected even less ‘competition’ in deals from PE firms this year.

Annual deal flow

Year Strategic acquisitions Financial acquisitions Total
2008 $275bn $27bn $302bn
2007 $314bn $118bn $432bn
2006 $359bn $98bn $457bn

Source: The 451 M&A KnowledgeBase

GRC=Get Ready for Consolidation

Brenon Daly

Contact: Brenon Daly

After a pretty thin stretch of deals in the governance, risk and compliance (GRC) market, Thomson Reuters reached for startup Paisley Consulting last week. The deal comes after the two companies partnered for a year, but not in the conventional manner. Rather than the big company reselling the startup’s wares, Paisley actually resold Thomson’s tax and auditing product, Checkpoint. The two companies also had a fair number of joint customers.

We understand that Paisley wasn’t really looking for a deal. Founded in 1995, Paisley is still run – and was majority owned – by its founding husband-and-wife team of Tim and Stacey (née Paisley) Welu. (The pair will continue to run the business after the acquisition.) The Minneapolis–based company took only one round of outside money, a $10m slug in 2003 from Insight Venture Partners. Despite its beginnings, Paisley was no mom-and-pop shop. We understand the company is set to finish 2008 with sales of more than $40m.

The Thomson-Paisley pairing comes after several large software companies, which would be the most conventional buyers of GRC startups, inked deals of their own. Oracle stayed close to home, and grabbed existing GRC partner LogicalApps last year, while SAP made a big play for Virsa Systems in mid-2006. (As a side note on SAP’s move, we would mention that longtime Oracle executive Ray Lane sat on Virsa’s board and helped broker the initial partnership that led to the purchase.)

With Paisley gone, there are still a few high-profile GRC vendors in the market. BWise, which has its roots in the Netherlands, has a strong presence in Europe; OpenPages, which started life as a content management vendor before focusing on GRC; and a company that’s not unlike Paisley, Archer Technologies, which my colleague Paul Roberts recently profiled. We understand that both BWise and Archer, which is about half the size of Paisley, have been talking with potential suitors throughout the year. However, a month ago, Archer sold a 40% stake of the company to Bain Capital Ventures, which likely takes it off the block for now.

Corporate dealmaking

Brenon Daly

Contact: Brenon Daly

Since our annual survey of corporate development executives is currently being filled out by those dealmakers, we thought we’d take a quick look at business there. (Note: If you are a corporate development officer and would like to take part in our survey, please email me and I will send you a copy. Those who participate will get a full look at the results, plus additional comparisons with the previous year’s findings. See that report here.)

At first glance, corporate spending looks pretty healthy, roughly matching the levels of the previous three years. (For our purposes, we searched our M&A KnowledgeBase for acquisitions announced this year by companies that trade on the Nasdaq or NYSE.) Our first observation is that US companies are pretty much the only ones doing any shopping. Their spending accounts for three-quarters of all tech M&A spending that we’ve tracked this year, compared to about half of the total in each of the past two years.

However, we would quickly add that (not surprisingly) deal flow has been drying up as the year has gone along. In the third quarter, the total value of acquisitions by US publicly traded acquirers hit just $16bn, down from $144bn in the second quarter and $38bn in the first quarter (second-quarter results were inflated because the four largest deals of the year, including three mammoth communications transactions, were announced in the summer). In the next week, we’ll tally what corporate development executives predict for 2009 and have a report on that.

Acquisitions by US listed companies

Period Deal volume Deal value
January-November 2005 945 $204bn
January-November 2006 1,084 $251bn
January-November 2007 961 $193bn
January-November 2008 793 $218bn

Source: The 451 M&A KnowledgeBase

Bargains for holiday shopping

Brenon Daly

Contact Brenon Daly

As we flip the calendar for the final month of 2008, we had to check that we weren’t in fact mistakenly looking at 2005’s calendar, at least in terms of M&A. That’s because deal flow this year is looking a lot like it did three years ago. So far, we’ve seen some 2,687 deals with an announced value of $286bn, compared to 2,761 deals worth $336bn during the same period of 2005. Compared to last year, spending is down some 37%.

As for what we might expect from financial and strategic shoppers in the final month of 2008, we think they’ll be mirroring retail shoppers. In other words, they’ll be looking for bargains. (We would point to the unprecedented ‘door-buster’ markdowns that sellers used to lure shoppers over the Black Friday weekend.) Already, we’ve seen the price tag of an average tech deal shrink to $106m this year. That’s down from an average of $134m in 2007 and $122m in 2005. Granted, this is a raw figure of all tech spending divided by the number of deals. But the direction of the aggregate number each year is telling.

Year-to-date tech M&A

Period Deal volume Deal value
January-November 2004 1,871 $151bn
January-November 2005 2,761 $336bn
January-November 2006 3,693 $428bn
January-November 2007 3,384 $455bn
January-November 2008 2,687 $286bn

Source: The 451 M&A KnowledgeBase

‘Lighter’ M&A at Nuance

Brenon Daly

Since former rivals Nuance Communications and Scansoft welded themselves together three years ago, the combined company has been shopping at a furious rate. In 2007, the speech-recognition vendor inked seven acquisitions. So far this year, it has spent some $640m on three acquisitions. (That doesn’t count an unsolicited offer for Zi Corp.) The company has used its purchases to focus on specific products for the healthcare market, bolster its mobile offering and expand into Europe.

However, don’t expect Nuance to continue shopping. The company told Wall Street on Monday that its current fiscal year will be ‘lighter’ in terms of M&A, with small deals serving narrow focuses. Cash will be currency for any purchase, since Nuance said it is ‘unlikely’ to use equity in a deal and the debt market is currently closed.

Nuance generated some $196m in cash from operations in the just-completed fiscal year, and had $262m in cash and equivalents at the end of September. However, it also carts around $895m in long-term debt going back to its earlier shopping spree, which has attracted a number of bears to Nuance. At various points over the past year, investors have sold as many as 35 million shares of Nuance short. That’s roughly equivalent to the amount of Nuance shares that typically change hands in more than 10 days of trading, although the number of shares sold short has been declining in recent months.

Extended hours at boutiques

-Contact Thomas Rasmussen

Results from our fourth annual Tech Banking Outlook Survey earlier this week showed that bankers are turning bearish. Delving further into the data, we took a look at how it breaks out among banks of various sizes. When asked about the average time to closing a transaction, bankers said the length had trended up by less than a quarter of a month. Hardly a significant slip. Nonetheless, what struck us was that respondents who identified themselves as belonging to smaller shops (1-14 principals) showed an increase in time to close over last year of about a half-month to an average of 8.2 months. This compares to larger banks (25+ principals) reporting an average closing time of 7.6 months or very large banks (50+ principals) reporting an average closing time of 7.3 months.

Anecdotally, we’ve heard about deals dragging on for some time. (Two recent deals, for instance, took more than two years to close, bankers from two different boutiques recently lamented.) Obviously, the delays are mostly due to the uncertain economic outlook among acquirers, who have virtually all of the leverage in negotiations these days because they are the only exit available to startups. Indeed, bankers cited the cloudy picture at tech companies as the main reason that deal flow will be down next year.

And deals could lag even more next year. The reason? Broadly speaking, terms for the transactions closed so far this year were set before the October meltdown on Wall Street. We’ve already seen the upheaval in the credit market force recalibrations in the purchase prices of several acquisitions, including Brocade’s big pickup of Foundry. Those price cuts, which typically involve bumping back shareholder votes, string out deals. And every day that deals don’t close, the market seems to weaken. The Nasdaq, having dropped 25% in the past month alone, is currently at a six-year low. Since buyers are acutely aware of that decline, they’re increasingly going to be looking for a discount on what they plan to purchase. With every bid and counterbid, the deal cycle lengthens.

Survey says …

Brenon Daly

Against the backdrop of historic turmoil on Wall Street, we sent out our fourth annual Bankers’ Survey to clients to get their views on where their business is now and where it’s heading. The take-away: It’s all heading down. Truly, every question – from assessments of overall pipelines to forecasts for specific lines of the banking business to headcount projections to the prediction of number of IPOs next year – prompted a dour outlook.

We’ll have a full report on the 15-question survey in tonight’s 451 Group daily email, but in the meantime we wanted to share two of the highlights (of the bearish variety) from the 127 responses to the survey. Perhaps the most revealing finding is that when bankers looked at the value of current deals in their pipeline, more than half of them said it had shrunk since the same time last year.

The dried-up pipelines have tech bankers seeing their ranks thinning even more in the coming months. (Note: Our survey was taken before Citigroup announced plans to cut some 52,000 jobs, the single largest corporate reduction in years.) Some 35% of respondents to our survey expect additional headcount reductions at their own firms, four times the percentage that predicted layoffs last year. Again, look for a full report on the survey later tonight.

Dealing with a legacy

Brenon Daly

Justly or not, acquisitions go a long way toward shaping a CEO’s legacy. (If you don’t believe us, just ask Jerry Levin, who sold Time Inc for what turned out to be a pile of wampum, in the form of overinflated AOL equity.) With Monday’s announcements that two major tech CEOs are on their way out, we pause to look at how deals – or lack of deals – will shape their respective legacies.

Let’s start with Symantec’s John Thompson, who will leave the storage and security giant by the end of its current fiscal year next April. Under his nearly decade-long leadership, Symantec shares rose some 500%, compared to a flat performance over the same period in shares of rival McAfee and a 40% decline in the Nasdaq. However, the one blemish on his record is Symantec’s largest-ever deal, its $13.5bn purchase of Veritas. (Thompson guided Symantec through more than 40 other acquisitions during his tenure.) Symantec shares peaked at about the time the company announced the deal, and have given back most of the gains they had piled up since mid-2003.

And then there’s Yahoo’s once-and-future king, Jerry Yang. We’re guessing history will be less kind to the man who turned down Microsoft’s offer of at least $31 for each share of Yahoo. Shares of the foundering search giant briefly dipped into the single digits earlier this month. However, they jumped almost 10% on Tuesday as Wall Street applauded the imminent departure of Yang, who has overseen the incineration of some $20bn of shareholder value since he reassumed the top spot at Yahoo in June 2007.

Aside from the ‘relief rally’ for Yang’s move, Yahoo shares also got a boost from speculation that the turnover in the corner office makes a deal with Microsoft more likely. We have our doubts about that. Instead, we’d focus on what the CEO change at Symantec means for deal activity. Our bet: Incoming CEO Enrique Salem will unwind several large chunks of the Veritas business, perhaps starting with NetBackup. As recently as last summer, Thompson said ‘nothing’ from the under-performing Veritas portfolio was for sale. Salem will set the company’s line on that in the future, and we wouldn’t be surprised to see NetBackup or other storage assets find their way onto the block.

Market imbalance

Brenon Daly

The markets are shrinking. And we’re not just referring to the trillions of dollars of value that have been lost from the New York Stock Exchange and the Nasdaq over the past year. Instead, we’re talking about the actual number of companies on the markets.

Listings rise and fall over the years, as companies go public or get acquired. At least, they do in normal years. But in a year like 2008, with black swans flying across the sky, the number of listings just falls (rather like the prices of the stocks that remain on the exchanges). Already this year, we’ve seen some 62 US publicly traded companies get acquired. On the other side of the ledger, we’ve had fewer than 10 technology IPOs since January. (And don’t look for Metastorm, which filed to go public in mid-May, to debut on the Nasdaq anytime soon. The company pulled its planned offering on Thursday.)

In terms of M&A dollars, as you might guess given the state of the markets, the companies that trade on them have been sharply marked down, as well. While the number of deals has dropped 27%, the value of those deals has plummeted twice that amount (56%). In addition, spending on public company deals has declined even more than the overall tech M&A market, which has sunk about 40% in terms of dollars spent so far this year.

Acquisitions of US public companies

Period Deal volume Deal value
January 1-November 14, 2007 85 $250bn
January 1-November 14, 2008 62 $109bn

Source: The 451 M&A KnowledgeBase