Tag: M&A

Lawson: silence, suitors and synergy

Brenon Daly

Contact: Brenon Daly

If Lawson Software had held its scheduled call later this afternoon to discuss its third-quarter earnings report, we suspect that attendance would have been a bit higher than usual. Instead, the old-line ERP vendor scrapped it, citing the two-week-old unsolicited offer from industry consolidator Infor Global Solutions. (Those sorts of things tend to happen to companies that count Carl Icahn as their largest shareholder.) Lawson, advised by Barclays Capital, has said only that it is reviewing the proposal.

While Lawson’s silence is entirely understandable from a company that’s been put in play, it did nothing to dampen investor speculation that another suitor would show up. The stock, which has traded above the $11.25-per-share bid since it was launched, inched a little higher to $12.14 in Thursday afternoon activity. Lawson shares haven’t seen these levels since March 2002.

Perhaps inevitably, Oracle’s name has surfaced as a potential buyer. While Lawson isn’t particularly cheap, it’s also not particularly expensive. Its current market cap of $2bn works out to about 2.6 times projected sales of $770m for the current fiscal year and roughly 15x EBITDA. Another way to look at it: the market values Lawson at about 5x its maintenance revenue. (For comparison, Epicor Software trades at 1.7x sales and roughly 3x maintenance revenue.)

For buyout shops, Lawson’s valuation is already at the upper end of the range that could still deliver a decent financial return, we would think. Of course, Infor is owned by a private equity firm, Golden Gate Capital. But in terms of bidding, Infor is more of a strategic buyer than a financial one when it comes to ‘synergies.’ After all, privately held Infor already has the corporate infrastructure in place to run a $2bn business, roughly three times the size of Lawson.

Buying a new look

Brenon Daly

Contact: Brenon Daly

In any business, it’s tough to take the old and make it new. In fact, that sometimes requires a little outside help. That came through in Walgreens’ purchase Thursday of Drugstore.com. After all, here is Walgreens – a 110-year-old chain that’s the largest drugstore in the US – saying it can’t necessarily get its online business where it wants it to be on its own. So the company is set to hand over $429m in cash for Drugstore.com to bolster its online sales.

As an aside, the deal caps a run by Drugstore.com that in many ways embodies the whole Internet Bubble. It was a hot IPO back in 1999, just five months after opening its virtual doors. Sales were still in the single digits of millions of dollars when it went public. Of course, investors couldn’t get enough of the freshly minted equity – at least not until the Bubble burst in 2000.

After that, shares never again traded in the double digits. Walgreens is set to pay $3.80 for each share of Drugstore.com, more than twice the market said the stock was worth the day before the deal was announced. The kicker on Drugstore.com is that the company was probably more highly valued when it was a tiny startup in a frothy era than today, when it is a business generating about a half-billion dollars in sales.

Actually, this is the second transaction in a month that has seen an Old Economy company pay up to join the New Economy. In mid-February, Nordstrom threw $180m at HauteLook to get into the private-sale marketplace. (Terms also include a potential $90m earnout for HauteLook.) To understand the motivation, consider the relative age of the two sides in the transaction: Nordstrom opened its first store in 1901, while HauteLook went live (in the digital parlance) only in 2007.

Oracle has gone silent

Brenon Daly

Contact: Brenon Daly

While investors will be tuning in for Oracle’s Q3 report after the market’s close today, we can’t help noting that there hasn’t been much news from the consolidator recently. It has yet to announce a deal in 2011, an uncharacteristic dry spell for a company that averaged an acquisition every six weeks in each of the past two years. In Q1 2010, Oracle announced three transactions and even in the recession-wracked Q1 2009, the software giant announced a pair of deals – but nothing so far this year.

In fact, Oracle has been out of the market since it spent $1bn on Art Technology Group in early November, nearly five months ago. And it’s not just Oracle that’s currently on the M&A sidelines. Fellow big-name buyers such as Microsoft, Symantec, EMC and Nokia have all yet to open their accounts in 2011. Even serial shopper IBM was also on that list until earlier this week, when it announced its purchase of Tririga

A post-recession spending record — and then some

Brenon Daly

Contact: Brenon Daly

The first-quarter M&A totals for the tech industry suddenly look a lot different. AT&T’s announced acquisition of T-Mobile USA from parent Deutsche Telekom dramatically inflates the spending, more than doubling the collective value of the 750 transactions announced so far in 2011. The $39bn deal (the largest purchase in the telecom industry in a half-decade) compares to $29bn worth of transactions in the first 11 weeks of the year.

Further, it wasn’t just Ma Bell’s massive consolidation play in the wireless space that pushed up the total on Monday. Liberty Global announced plans to spend a total of $4.5bn on German cable operator Kabel Baden-Württemberg. Additionally, Charles Schwab said it will shell out $1bn in stock for optionsXpress Holdings, its largest deal in a decade. And Broadcom continued its recent steady run of dealmaking, handing over $313m for Provigent. Altogether, that pushed M&A spending so far this quarter to $74bn – the highest quarterly total since Q2 2008. And the post-recession record is only headed higher: the first quarter doesn’t wrap up until a week from Thursday.

Out with the old, in with the new

Brenon Daly

Contact:  Brenon Daly

Just over the past week, we’ve been struck by the fact that after in-house development efforts came up short, companies simply reached out of house for other companies that were doing the same thing – only better. In one case, it was to buy; in another case, it was just to partner.

Take Hewlett-Packard’s purchase earlier this week of Vertica Systems. (Subscribers can see our full report on the transaction, including our estimates of the undisclosed deal terms.) The purchase came just three weeks after HP said it was phasing out its Neoview platform, which never caught on in the otherwise fast-growing data-warehousing market. (We’re just guessing, but the move might have also been rooted in personal reasons, as well as financial reasons. Neoview was closely associated with HP’s former CEO Mark Hurd, who has been taking shots at his former shop ever since he joined Oracle.)

Although that acquisition doesn’t entirely line up with Nokia’s ‘strategic alliance’ with Microsoft, there are more than a few echoes. In both cases, a tech giant – armed with tens of millions of R&D dollars, not to mention dozens of engineers dedicated to the effort – was in danger of slipping into irrelevancy in an explosively growing market. The agreements represented dramatic about-faces for HP and Nokia. But that’s probably better than both trying to put a good face on what the market has said is a losing effort.

A four-bagger for VMware

Brenon Daly

Contact: Brenon Daly

If the virtualization thing doesn’t work out for VMware, the company could always spin off a hedge fund. At least that’s what we’ve been thinking as Verizon Communications’ purchase of Terremark Worldwide appears set to close very soon. When the deal does wrap, VMware will walk away with a tidy windfall from a savvy bet that the virtualization kingpin made on the hosting provider back in mid-2009.

Recall that in May 2009, VMware picked up a 5% stake in Terremark for $20m, paying just $5 for each of the four million shares. According to terms, that block of equity will be worth $76m when it comes time to cash out to Verizon, which is paying $19 for each Terremark share. A four-bagger in just a year and a half is a return that might even make John Paulson envious. The gain on VMware’s investment in Terremark even outpaces the return of its own highflying stock, which has ‘only’ tripled in that time.

Everything is bigger at Big Blue

Brenon Daly

Contact: Brenon Daly

Sometimes, we forget why IBM is called Big Blue. The giant just reported $100bn in sales for 2010, making it more than twice the size of Cisco Systems and almost four times the size of Oracle. (Just on its own, IBM’s software portfolio is larger than all of Oracle, not to mention the fact that IBM’s software operations are vastly more profitable than Oracle.) IBM’s current valuation is big, too, with shares currently changing hands at their highest levels ever.

And, as we listened to the company discuss its recent financial results, we were reminded that it has a big appetite for deals. It dropped a cool $6bn on acquisitions last year, with half of that coming in just the fourth quarter. Just in the last year, IBM took two public companies off the board (Netezza, Unica), gobbled up another two companies that could have been looking for an IPO (Initiate Systems, BigFix), and was even on the buyside of an unusual $1.4bn divestiture (AT&T shedding Sterling Commerce). Of course, it’s easy to write those big checks when the company generated more than $16bn in free cash flow in 2010.

A decoupled and depressed tech M&A market

Brenon Daly

Contact: Brenon Daly

As we were putting together our full report on M&A last year and the outlook for this year, we couldn’t help but notice the fact that 2010 basically slumped to an end. On average, spending hit just $12bn in each of the last four months of 2010, down from about $20bn for the summer months. Not only that, spending in the September-December period last year substantially lagged the same time in 2009, with three of the four monthly totals in 2010 actually declining, year over year.

The rather muted M&A activity toward the end of 2010 stands out even more because there was a lot of confidence in the equity markets during that time. Despite a long-standing correlation between the two markets, dealmakers basically sat on their hands during the tremendous rally in the final months of 2010, which essentially accounted for all of the gains on the indexes last year. The Nasdaq jumped 17% last year, although more than a few tech companies wrapped the year with tidy triple-digit gains in their stock prices.

To explain the unusual decoupling between the equity and M&A markets in 2010, we might point to the unprecedented government intervention in the debt and credit markets. In the short term, the measures have helped buoy those markets, even if some of the underlying problems (unemployment/underemployment and foreclosure rates) remain alarmingly unresolved. There was no Washington-brokered ‘stimulus package’ for dealmakers. (Again, see our full report to get more details on activity and valuations in the year that was, and what to look for in the year that’s here.)

What’s ultimate destination for Ultimate Software?

Brenon Daly

Contact: Brenon Daly

After 20 years in business, Ultimate Software may be looking for a new owner. The human capital management (HCM) vendor is rumored to have retained Lazard to shop the company, market sources have told us. The bank will run a narrow process, likely approaching about a half-dozen possible buyers rather than running a full auction, the sources added.

The decision by Ultimate to test the market comes as deal flow in the HCM sector has hit a record level. In 2010, we tallied some $2.4bn in spending on deals, slightly eclipsing the previous record of $2.1bn in 2007, according to The 451 M&A KnowledgeBase. Valuations across the space have been soaring, and Ultimate is no exception. This time last year, shares of the Weston, Florida-based company were changing hands at about $30 each. Now, they’re at $50 – an all-time high. That gives Ultimate a market value of $1.25bn, roughly 4.6 times projected 2011 sales of $270m.

Much of the gain can be chalked up to the company’s decision a few years ago to switch from selling software licenses to a subscription model. (It’s a move that has proved incredibly lucrative for other old-line software companies, as well. Shares of Concur Technologies, which underwent a similar shift in sales model a few years ago, have quadrupled over the past five years and are now valued at $2.8bn.) Ultimate stopped selling new software licenses in April 2009 and recurring revenue (made up of both subscription and maintenance revenue) is now more than three-quarters of total sales.

Big is back (sort of)

Brenon Daly

Contact: Brenon Daly

The number of big-ticket deals in 2010 jumped by one-quarter from the level posted in each of the past two years, an indication that buyers are once again open to a bit more risk. We tallied 40 transactions valued at $1bn or more last year, up from 32 in 2009 and 33 in 2008. One of the reasons for the rise in 2010 – unlike the two previous years – is that the acquirers had to top a pretty bullish tech market to secure their deals. Companies including Isilon Systems, Netezza, ArcSight and 3PAR all got taken off the board last year at their highest-ever valuation.

Also unlike the two previous years, we had a number of ‘serial shoppers’ on the list. Hewlett-Packard inked three 10-digit deals in 2010, while IBM and Intel each closed two of the big transactions as well. And it wasn’t just strategic buyers. The Carlyle Group announced a pair of billion-dollar acquisitions – on back-to-back days, no less. Overall, buyout shops accounted for seven deals last year valued at more than $1bn, up from four in 2008 and five in 2009.

10-digit transactions

Year Number of deals worth $1bn+
2010 40
2009 32
2008 33
2007 79
2006 74
2005 70

Source: The 451 M&A KnowledgeBase