Tag: M&A

2010: not the year it could have been for tech M&A

Brenon Daly

Contact: Brenon Daly

Looking back on dealmaking in 2010, it strikes us that it wasn’t the year that it could have been. With the recession (officially) behind us and many tech companies’ stock prices and cash hoards hitting record levels, we might have thought M&A last year would rebound to pre-Credit Crisis levels. That wasn’t the case.

In 2010, we tallied some 3,200 transactions – a slight 7% increase over the number of deals in the recession-wracked years of 2008 and 2009. In the far more important measure of tech M&A spending, the $178bn in 2010 represented a substantial 21% jump from 2009 levels. But it’s just half the annual amount we saw from 2005-2008. (In fact, the spending in the second quarter of 2007 alone eclipsed the full-year total for 2010.)

Looking deeper at last year’s activity of some of the key tech corporate buyers, we begin to see a partial reason for the muted overall spending, at least compared to pre-Crisis years. Yes, stalwarts like IBM and Hewlett-Packard continued their shopping sprees in 2010. Collectively, that pair announced 23 transactions worth a total of $11.1bn. But other tech bellwethers weren’t so quick to sign deals last year.

Microsoft announced just two purchases in 2010. Symantec sat out the entire second half of 2010 – a period, we might note, that saw its largest rival, McAfee, get snapped up. Cisco Systems did fewer deals in 2010 than in 2009. Included in the list of 2009 transactions for the networking giant were a pair of $3bn acquisitions (Starent Networks and Tandberg), while the largest deal Cisco announced last year was the $99m pickup of CoreOptics.

And although Dell was in the news often for M&A last year, both on successful and unsuccessful transactions, its overall activity basically kept pace with recent years. However, the company’s landmark purchase of 2010 (the $960m acquisition of Compellent Technologies) only ranks as the third-largest deal Dell has made since it jump-started its M&A program in mid-2007.

Tech bankers see a bit more of everything in 2011

Brenon Daly

Contact: Brenon Daly

As we all know, banking is a cyclical business. And after a painfully sharp downturn in recent years, the business is swinging back. It looks to be swinging even higher in 2011, according to our annual survey of many of the top dealmakers. (See our full report on the results.) We would note, too, that the rebound is expected for both the tech M&A market as well as the tech banking industry itself.

Consider this: Four out of five tech investment bankers said their pipeline appears fuller now than it did a year ago, up from two-thirds of them who said the same thing in our previous year’s survey. If we flip it around, just one out of 20 bankers (7%) said the pipeline is drier than it was a year ago, down from one out of five (20%) who said the same thing in the previous survey. The recovery is even more pronounced when we consider that in our 2008 survey, more than half of the bankers said they had fewer mandates in the pipeline than they did the prior year.

Meanwhile, concerning the tech banking business itself, respondents indicated that their firms expect to be hiring more in the next six months. They also reported that deals were closing more quickly and fee rates on the transactions were actually ticking higher.

And the Golden Tombstone goes to …

Brenon Daly

Contact: Brenon Daly

In addition to asking corporate development executives in our annual survey to look ahead and predict M&A activity and valuations in the coming year, we also asked them to look back and tell us which deal of the previous year they thought was the most significant. The winner for 2010? Intel’s $7.7bn purchase of McAfee, an unexpected transaction that landed the largest stand-alone security company inside the dominant supplier of microprocessors. At nearly twice the value of the previous largest security deal, it’s a risky bet that security will become another integral consideration around silicon, along with power consumption and performance.

The landmark Intel-McAfee pairing barely edged out Hewlett-Packard’s contested acquisition of high-end storage vendor 3PAR in the voting by corporate development executives for the Golden Tombstone for the top deal of the year. Past winners of the highly coveted award include Oracle-Sun Microsystems (2009), HP-EDS (2008) and Citrix-XenSource (2007).

We suspect that the competition for next year’s Golden Tombstone may be even more intense, at least according to one indication in our survey. (See our full report on the survey.) When we asked corporate development executives about how likely they were to do ‘transformative acquisitions,’ more than half (52%) said they planned to do one of these risky, bet-the-company kind of transactions. In our 2009 survey, just one out of five respondents said that.

A less-than-bullish outlook for corporate shopping

Brenon Daly

Contact: Brenon Daly

The results of our annual survey of corporate development executives are in and the outlook for technology M&A in the coming year is less than bullish. Consider this change in sentiment: the number of respondents who thought the overall M&A market would improve in the coming year dropped from half (52%) in the 2009 survey to just one-third (35%) this time. Meanwhile, the percentage that projected the market will be worse tripled from just 7% last year to 23% this year. The fact that roughly one out of four corporate buyers expects the market to deteriorate is a rather bearish sign, we would suggest.

Moreover, that bearishness around the overall market carries over to projections about their own company’s buying plans for 2011. Just half (52%) said they expected to be busier in 2011 than this year. That’s down from two-thirds (68%) who said the same thing last year. (In 2009, 15% of respondents said the acquisition pace at their firms would ‘increase significantly,’ twice the level that said the same thing in this year’s survey.) See our full report on the outlook for M&A activity and valuations in the coming year from corporate development executives.

Juniper back in the market — and how

Brenon Daly

Contact: Brenon Daly

Just nine months after Juniper Networks picked up a small stake in Altor Networks through the startup’s second round of funding, the networking giant decided Monday to take home the whole thing. Juniper will hand over $95m in cash for the rest of the virtual firewall vendor. (Altor had raised around $16m in backing, including the undisclosed investment from Juniper.) At the time of the investment, Juniper said it planned to develop an ‘even closer’ relationship with Altor, its primary virtualization security partner. See our full report on the deal.

The purchase of Altor stands as Juniper’s fifth acquisition this year, and brings its M&A spending to almost $400m so far in 2010. That’s fairly remarkable activity, considering that Juniper had been out of the market for a half-decade. And with the exception of its recent pickup of Trapeze Networks, Juniper’s buys have been big bets on small companies. The networking giant has paid $70m-100m each for Ankeena Networks, SMobile Systems and Altor – and we gather that all three of the target companies were running in the single digits of millions of dollars.

Recent Juniper acquisitions

Date Target Deal value Rationale
December 6, 2010 Altor Networks $95m Virtualization security
November 18, 2010 Blackwave (assets) Not disclosed Internet video content delivery
November 16, 2010 Trapeze Networks $152m Wireless LAN infrastructure
July 27, 2010 SMobile Systems $70m Mobile device security
April 8, 2010 Ankeena Networks $69m Online media content delivery

Source: The 451 M&A KnowledgeBase

Tech M&A slumps toward the year-end

Brenon Daly

Contact: Brenon Daly

Tech M&A appears to be heading toward a quiet end to the year, with November marking the third straight month of declining spending on deals. The slump puts the value of deals announced in the just-completed month at about half the level we were recording in the months earlier this summer. Overall, we tallied 252 deals worth $11.2bn. (And as a side note to the total, we would highlight the fact that the spending in November was highly concentrated. A trio of deals – EMC’s purchase of Isilon, the Novell buyout and Oracle’s reach for Art Technology Group – accounted for nearly half the value of all transactions announced last month.)

It’s not just that November slipped when compared to other months this year. The paltry $11.2bn in aggregate M&A value is just one-third the level recorded in November 2009, and is even lower than the total in November 2008, when the economy was in the grips of the worst economic recession in 70 years. In fact, spending for the just-completed November is coming in at about half the average level for the month over the past four years.

As to what this means for tech M&A in 2011, we’re turning to the people who will be striking the deals next year. In the next day or two, we’ll be sending out our annual survey for corporate development executives and tech investment bankers. The surveys cover forecasts for M&A activity, as well as valuations. Anyone interested in filling out the survey (a quick, painless and confidential process), just email me and I’ll send along the appropriate survey. For those who receive the survey in their inboxes soon, we would appreciate 5-10 minutes of your time to get your views on where the M&A market is heading next year.

Buyouts are back

Brenon Daly

Contact:  Brenon Daly

The pending take-private of Novell underscores just how much private equity (PE) activity has rebounded since the Credit Crisis nearly shut down tech buyouts. The $2.2bn purchase of infrastructure software and SUSE Linux vendor Novell stands as the seventh PE tech deal so far this year valued at more than $1bn. That’s up from five big-ticket transactions in all of last year and only four in 2008.

What’s behind the buyout boom? The reopened debt market has allowed PE shops to make bigger bets once again. Consider this: With still more than a month left to go in 2010, PE firms have already tallied 264 deals valued at $30.2bn. The spending level is 50% higher than in all of 2009 and tops 2008, as well.

Also adding to the spending totals is the fact that targets are getting richer valuations. We’ve seen a trio of large leveraged buyouts (LBOs) go through this year with enterprise values of 4 times sales or even higher. However, that’s not the case with the latest LBO for Novell. Cash-rich Novell is garnering an enterprise value of $1.2bn, or just 1.5 times sales. Still, Novell’s LBO price is about 50% higher than where the company was valued at the start of the year.

PE Activity

Year Deal volume Deal value
YTD 2010 264 $30.2bn
2009 301 $19.7bn
2008 249 $24.8bn
2007 305 $118.4bn

Source: The 451 M&A KnowledgeBase

Reading Cisco’s signals

Brenon Daly

Contact: Brenon Daly

As a bellwether for the tech industry, Cisco Systems laid out a fairly bearish outlook for Wall Street in its report on fiscal first-quarter results. The projections of lower-than-expected revenue at the networking giant trimmed some $20bn from its market value Thursday, and helped dragged down the Nasdaq, which has tacked on 6% over the past month. But from our perspective, Cisco is not just a key indicator for the equity market – it’s also a key indicator for the M&A market.

Looking more closely at the company’s fiscal Q1 report, we can’t help but be struck by Cisco’s paltry M&A spending. During the August-October period, the company handed over a total of just $69m (net of cash at acquired companies) for its purchases of ExtendMedia and Arch Rock. (Specific terms on both deals weren’t disclosed.)

While that may sound like a lot of money, it’s pocket change to Cisco, which generated $1.7bn in cash flow from operations in the quarter. Or more dramatically, consider this: during Q1, Cisco spent $2.5bn on share repurchases. That means it spent more than 35 times more on its own equity than on the equity of other companies.

Not that Cisco has been alone in staying out of the big-ticket M&A market recently. We noted that October (the final month of Cisco’s fiscal first quarter) was the first month of 2010 that a tech company didn’t announce a single transaction valued at more than $1bn. Obviously, that streak was broken last week, when Oracle said it was spending $1bn for Art Technology Group. Still, it was only Oracle’s second significant acquisition of the past 18 months.

An acquisition breaks the back of Bakbone

Brenon Daly1 Comment

Contact: Brenon Daly

In some ways, it was a misguided purchase last year by BakBone Software that led to yesterday’s distressed sale to Quest Software. The backup and recovery vendor made its largest-ever acquisition in May 2009, paying some $16m in cash and stock for ColdSpark. The rationale of the combination seemed sound at the time: broaden BakBone’s data-protection platform by adding ColdSpark’s messaging management. What could go wrong with that?

Unfortunately, plenty went wrong, as the two businesses never meshed. BackBone relies heavily on its indirect sales channel, while ColdSpark sold directly into enterprises. The average sales price for the messaging software was significantly higher than BakBone’s core storage products, which made for a highly unpredictable sales cycle at the acquired business. In the roughly one year that it owned ColdSpark, BakBone recorded only $1m in revenue from the business, according to SEC filings. It shuttered ColdSpark last May.

The integration struggles, however, came at a steep cost to BakBone, a Bulletin Board-traded company where cash has always been tight. Consider this: to generate the roughly $1m in sales at ColdSpark required spending of more than $3m in just R&D and sales/marketing efforts, to say nothing of the additional costs at the business. The spending drained BakBone’s treasury to just $5m, as of the company’s latest quarterly report.

Obscured by the smoke from the flameout around the acquisition is the fact that BakBone’s core storage management business actually puts up pretty decent numbers. In the latest fiscal year, it has run at a respectable 91% gross margin and 13% operating margin, while sales increased 9%. It boasts more than 17,000 customers. And Quest is getting all that for a relative bargain, paying just 1x sales for BakBone. As a final note on the deal, which is expected to close early next year, we would add that BakBone stands as the only public company we’re aware of that Quest has ever acquired

Rich tech companies put away their checkbooks

Brenon Daly

Contact: Brenon Daly

Where are the corporate buyers? That’s what we were wondering when tech M&A activity in October came in well below both the year-ago period and the monthly average so far this year. Consider this: October stands as the first month in 2010 that so-called strategic buyers didn’t announce a single transaction valued at $1bn or more.

Instead, the shopping in October was led by private equity (PE) shops, notably The Carlyle Group. The buyout firm announced the two biggest tech deals of the month, with back-to-back acquisitions of CommScope and Syniverse Technologies. Carlyle values those two purchases at $6.5bn – representing half the value of all tech M&A spending in October. (See our full report on October’s M&A totals.)

Carlyle’s big pair of deals in October follows a more representative September, when IBM and Hewlett-Packard held the top two spots for large deals. (IBM paid $1.8bn for Netezza on September 20, a week after HP said it will pay $1.65bn for ArcSight.) More broadly, tech companies have posted a number of 10-digit transactions since the summer, with Intel notching two of them, plus the typically acquisition-averse SAP doing the largest deal in its history in May.

It’s hard to figure out exactly what’s keeping companies out of the market these days. Third-quarter financial results, many of which were announced in October, have been solid for the most part. Similarly, guidance for the fourth quarter and into 2011 has been relatively upbeat. Reflecting that, the Nasdaq tacked on nearly 6% in October, helping the tech-heavy index approach the highs that it hit both back in April and in mid-2008. Further, the cash just keeps gushing into the treasuries at many tech companies.