Tag: M&A

Frightfully light M&A totals in October

Brenon Daly

Contact: Brenon Daly

The economic recession may be (officially) over, but the recession in tech M&A lingers on. If anything, it’s getting deeper, with the fourth quarter starting at a particularly sluggish pace. In the just-completed month of October, we tallied only 243 deals worth a collective $11.7bn. Not only is that substantially below the same month last year, but it also significantly lags the average monthly M&A activity that we’ve recorded so far this year. The reason? Corporate buyers largely sat out the month.

Year over year, the number of deals in October 2010 declined 15%, while spending dropped 22%. Similarly, when compared to earlier months in 2010, October is going down as one of the weakest months for acquisitions. Through the first three quarters of the year, the average number of monthly transactions stood at 268, or about 9% higher than the 243 deals in October. (Indeed, only one month in 2010, August, has recorded fewer deals than October.) The drop-off in M&A spending in October is even more pronounced. The total value of transactions hit just $11.7bn, which is 25% lower than the average monthly spending of $15.7bn in the nine months leading up to October.

Obviously, we don’t want to read too much significance into a single month worth of numbers, particularly in a business as inherently lumpy as M&A. Nonetheless, we might suggest that M&A has joined a number of other markets that have largely been bypassed by the recovery. Clearly, the impact of tech acquisitions not getting done is nowhere near as significant, for instance, as the dreadful employment picture (one out of 10 Americans out of work) or the seemingly intractable housing mess (banks will likely foreclose on more than one million homes this year). But the continuing tech M&A slump is still worth noting as yet another sign of how far we are from where we once were

Small purchases add up big for IBM

Brenon Daly

Contact: Brenon Daly

Shortly after IBM bagged Netezza, we noted that Big Blue had been doing some big-game hunting in recent deals. It turns out that’s also true when it takes aim at private companies. In fact, we estimate IBM has spent more on startups than it has on the public companies it has taken home over the past year.

First, we should qualify a bit of our math. In the past 12 months, Big Blue has announced 17 acquisitions. Included in that flurry of dealmaking is the purchase of a pair of public companies (Unica and Netezza), the pickup of a billion-dollar carve-out (the Sterling Commerce business from AT&T) and the acquisition of 14 privately held companies. IBM has not disclosed a single price for any of the more than dozen private companies it has snared since last October, even though some of them are costing the company – that is to say, its shareholders – several hundred million dollars a pop.

Nonetheless, we have estimates of the price tags of nine of the 14 deals. (These estimates have all been corroborated by at least two sources familiar with the transactions.) According to our estimates, more than half of the acquisitions (five of nine) cost IBM more than $200m each. Altogether, we estimate the nine deals set Big Blue back $2bn. That incomplete bill for the private company purchases is only slightly less than the $2.3bn that IBM disclosed it is spending on Unica and Netezza.

Oracle steps back into M&A market

Brenon Daly

Contact: Brenon Daly

After taking the summer off from M&A, Oracle on Monday announced the acquisition of authentication management startup Passlogix. The purchase is the first one by the normally acquisitive Oracle since it announced a pair of asset pickups in late May. Sitting out the summer slowed Oracle’s pace from steady deal flow earlier this year as well as other years. The Passlogix buy is Oracle’s eighth deal in 2010.

The first seven purchases, however, came in the first five months of 2010. That was ahead of the M&A pace Oracle held from 2005-2008, when it inked an average of a deal a month in each of the years. Oracle announced just eight acquisitions in recession-wracked 2009, when overall M&A activity was muted.

As we noted in our report on Q3 M&A, Oracle was one of the highly visible companies that didn’t announce a single transaction in the July-September period. Similarly, both Microsoft and Symantec sat out the quarter, too. But their inactivity was more than made up for by fellow tech giants Hewlett-Packard and IBM. That duo went on an M&A safari in the third quarter, with an eye toward bagging big game. In the just-completed July-September period, IBM and HP combined to announce 11 deals with a total bill of more than $7.3bn.

Third-quarter M&A: Forget the headlines

Brenon Daly

Contact: Brenon Daly

To get an accurate read on M&A this summer, you have to look past the headlines. Undeniably, there were a few high-profile deals, including the sale of McAfee in the largest deal ever in the security industry, as well as a high-profile bidding war that pushed 3PAR’s valuation into the double digits. Beyond those transactions, however, deal flow in the third quarter, which wraps today, has been distinctly average. Spending is coming in at $46bn, only slightly above the average spending of $40bn in the eight quarters since the Credit Crisis erupted.

The $46bn also sits at the midway point of spending in the first two quarters of the year ($30bn in Q1 2010 and $62bn in Q2 2010). It also nearly splits the difference between the previous year’s quarter ($38bn in spending in Q3 2009) and the previous quarter this year ($62bn in spending in Q2 2010). We’ll look at why the value of deals announced in late summer dropped one-quarter from the record level in early summer in a special report tonight, but for now consider this: Of the five largest transactions so far in 2010, just one was announced in the third quarter. Again, we’ll have a full report on Q3 M&A in tonight’s Daily 451 and 451 TechDealmaker sendouts.

salesforce.com patches a hole in its Service Cloud

Brenon Daly

Contact: China Martens

For some time, we’ve been expecting salesforce.com to make a second purchase in the service automation space. It’s a market the SaaS CRM and development platform player took a major step into back in early 2009 following its $31.5m purchase of French knowledge base provider InStranet in August 2008. It now appears as though salesforce.com has indeed made another foray with the acquisition of enterprise live chat player Activa Live, a move the companies aren’t commenting on but have confirmed to several third parties.

Based in St. Clair Shores, Michigan, Activa Live’s customers include American Apparel, Best Buy, Dun & Bradstreet, Endeca, LexisNexis and Procter & Gamble. The startup already had tight integration with Salesforce CRM. Its rivals include other chat specialists such as Bold Software, LivePerson and Velaro as well as a host of service automation software players that provide live chat modules such as eGain Communications, Kana, Moxie Software (formerly known as nGenera), Parature and RightNow Technologies.

Salesforce.com has been steadily building out Service Cloud and has found turning on-premises InStranet SaaSy a time-consuming experience. It’s keen to substantially grow the business, and owning more service automation components should further that goal.

Activa Live is another of salesforce.com’s under-the-radar purchases, deals that it barely refers to in public or doesn’t acknowledge at all. Such transactions already include the acquisitions of Welsh business orchestration firm Informavores, semantic analysis player GroupSwim, and reportedly Canadian SaaS website building, managing and optimizing tools provider Sitemasher.

Salesforce.com is still sitting on a boatload of cash after raising $575m in a private placement at the start of the year, and has only inked one substantial deal in its history – the surprise $142m acquisition of data-as-a-service (DaaS) provider Jigsaw Data in April. We continue to puzzle over what larger transactions salesforce.com might set its cap at, and would now add business information provider Zoom Information to the list as being potentially complementary to the vendor’s Jigsaw buy. DaaS is another arena where salesforce.com hopes to make big bucks

IBM and HP bag big game on M&A safari

Brenon Daly

Contact: Brenon Daly

With the news today that Hewlett-Packard is closing its recent pickup of Fortify Software, we wanted to take the opportunity to point out that the deal almost belongs in the minority of M&A moves HP has made so far this year. What are we talking about? Basically, that the tech giant has been doing giant deals. Of the seven acquisitions HP has announced so far in 2010, fully three of them have been valued at more than $1bn.

We noted in mid-April, which is before it inked any of its three 10-digit acquisitions, that HP had telegraphed to the market that it was going to do fewer transactions, but they were going to be bigger deals. (And we should add that its purchase of application security vendor Fortify wasn’t just a pocket-change deal. We understand that it paid $275m or so for the company.)

What’s interesting to note is that in the five months since we indicated that HP would be big-game hunting, one other company has joined it on safari: IBM. Big Blue has inked a pair of deals valued at more than $1bn since April – the pickup of AT&T’s Sterling Commerce business as well as Monday’s purchase of Netezza. Along the way, it has also done a steady flow of transactions valued at $150m-500.

Altogether, we calculate the tab for Big Blue’s five-month shopping spree at roughly $4.8bn for its nine acquisitions. (Incidentally, the amount of cash it spent is basically the same amount its business generated over that same period.) Meanwhile, HP spent about $1bn more ($5.8bn in disclosed or estimated deal values) on its seven purchases since mid-April. Taken together, these two companies have averaged about $2bn of M&A spending in each of the past five months. And they were sniping at each other about ‘buying’ R&D? Really?

M&A activity since mid-April 2010

Company Number of acquisitions Total M&A spending
HP 7 $5.8bn*
IBM 9 $4.8bn*

Source: The 451 M&A KnowledgeBase *Includes disclosed and estimated deal values

A bit of Big Blue inconsistency

Brenon Daly

Contact: Brenon Daly

Perhaps Mark Hurd feels vindicated. No, we’re not referring to the former Hewlett-Packard chief executive settling a lawsuit with his old shop. Instead, we’re talking about IBM’s stunning flip-flop with regard to high-profile M&A by itself and rival HP. At the least, Big Blue’s recent comments now appear inconsistent; at the worst, they smack of hypocrisy.

The specifics: A week ago, Big Blue’s CEO was blasting HP for ‘overpaying’ for deals, and for relying on M&A rather than R&D. Ironically, Sam Palmisano made these comments just as his own company was putting the final touches on its acquisition of Netezza, a deal that values the data-warehousing vendor at nearly 7 times this year’s forecasted sales for the current fiscal year. That’s more than twice the median software valuation, and basically matches the valuation that HP is handing over for ArcSight.

Incidentally, both transactions valued the targets, which had only come public within the past three years, at their highest-ever valuations. But if we look at how the shares of ArcSight and Netezza have performed so far this year, it becomes very clear that IBM was the much more aggressive suitor. Excluding the pop ArcSight shares got when word of a deal leaked in late August, the security vendor’s stock had only ticked up about 10%. In contrast, Netezza stock had run 150% from January to the day before Big Blue announced its purchase.

Economic realities set in for boutiques

Brenon Daly

Contact: Brenon Daly

Already this month, we’ve tallied deals advised by boutique banks including Revolution Partners, Pagemill Partners, GCA Savvian and others. The firms are all part of an increasingly crowded low end of the tech M&A market, which we covered more fully in a special report on boutique banks. Consider this fact: Each year, more than 100 distinct firms advise on at least one transaction closed. (We track that information in The 451 M&A KnowledgeBase and use it in our annual league table rankings.)

Despite the increasing number of boutiques, their share of the market continues to decline, at least when looked at on the basis of percentage of overall M&A spending. In 2009, spending on transactions advised by boutiques fell to just 6% of overall tech M&A – down from about 10% of advised spending in both 2007 and 2008. That cutthroat competition has left more than a few small advisory shops desperately trying to keep their doors open.

We wouldn’t at all be surprised if some of the boutiques started to wind up their practices later this year, with some partners moving on to other firms while other partners get out of the business altogether. In some ways, a thinning of the ranks is overdue, at least according to the industry itself (bankers can be so cold-blooded). In each of our past two annual surveys of tech investment bankers, by far the more likely change they predicted for the overall banking landscape was the shutdown of boutique banks. In late 2008, roughly four out of five tech bankers told us that a number of boutiques were likely to close their doors in 2009, while last December, more than two out of three bankers said the same thing about this year.

Advisory market share*

Firm classification 2007 2008 2009
Boutique 9% 11% 6%
Bulge boutique 9% 6% 11%
Full-service midmarket 15% 14% 9%
Bulge bracket 67% 69% 74%

Source: The 451 M&A KnowledgeBase

*Based on disclosed and estimated deal values, as percentage of overall annual M&A spending

Fat cat bankers? More like alley cat bankers

Brenon Daly

Contact: Brenon Daly, Adam Phipps

If the recent upheaval in the tech advisory practices at bulge-bracket banks was primarily caused by exotic financial instruments that nobody could really understand or even value, the shakeup looming for boutique banks has its roots in something much more fundamental: supply and demand. Essentially, there is an ever-shrinking number of tech M&A mandates available for an ever-growing number of firms.

With all the scrapping and discounting in the low end of the market, many boutiques are finding that getting a print these days is a costly bit of business. So what happened that turned the boutique bankers’ once-profitable and vibrant practice into a market where they’re all tripping over each other to pitch and then trying to undercut each other on price? We’ll look at that question – and the implications of the answer – in a special report on boutique banks in tonight’s Daily 451.

Shrinking mandates

Year Number of sell-side transactions*
2010 300 (annualized number, based on Jan. 1-Aug. 15 activity)
2009 296
2008 397
2007 464

*US-based technology companies, excluding telcos, that used advisers

Source: The 451 M&A KnowledgeBase

A deal in sight for ArchSight?

Brenon Daly

Contact: Brenon Daly

If nothing else, the long Labor Day weekend gave us all a chance to catch our breath following a week of some of the most frenetic dealmaking we’ve seen in some time. We had bidding wars, doubleheader deals and even a billion-dollar chip transaction. But in some ways, the loudest buzz in the tech M&A market came from a deal that didn’t happen: ArcSight still stands on its own.

The ESIM vendor was supposedly in play, at least according to a thinly sourced and almost woefully vague recent article in The Wall Street Journal. Not to pick apart the piece, but listing a half-dozen of the largest tech companies as ‘potential bidders’ misses a great deal of context. For instance, we noted two and a half years ago that Hewlett-Packard was rumored to have offered about $600m for ArcSight the summer before it went public. ArcSight is now worth twice HP’s rumored bid, and roughly four times the amount the market valued it at when it came onto the Nasdaq in February 2008, just before the IPO window pretty much slammed shut. (For the record, Morgan Stanley led the ArcSight offering.)

That stellar aftermarket performance raises another interesting point about ArcSight: despite the fact that its shares have quadrupled during a time when the Nasdaq has essentially flat-lined, the company has never done a secondary offering. It has just 37 million shares outstanding. That strikes us a narrow base for a firm with $200m in sales and a market valuation of more than $1bn. But maybe the company figures it shouldn’t bother selling shares at current market prices if it stands to get a substantial takeout premium on top of that. For our part, we wouldn’t at all be surprised to see ArcSight get a second exit.