A bummer of a summer

Contact: Brenon Daly

Since we’re right at the midpoint of the third quarter, we thought we’d check up on recent deal flow. (For all of the pre-decimalization Wall Street traders out there, this means that 2010 is now five-eighths in the book.) When we ran the M&A numbers for Q3 so far, we found that it’s been a bummer of a summer for dealmakers: The number of transactions from July 1 to August 15 hit a six-year low.

For the six-week summer period so far this year, the number of deals totaled just 373 transactions, only a slight 3% decline from the recent low (386 deals during the same period in 2008) but a whopping 30% drop from the recent high (530 deals during the same period in 2006). Further, the scant spending in the period so far puts the full third quarter on track to hit just the low end of the range we’ve seen since the Credit Crisis erupted. And that’s coming after a post-recession M&A spending record notched in the second quarter. (See our full Q2 report.)

There are a number of reasons for the light activity. The stock market has been weak lately, with the recent slide leaving the Nasdaq underwater for the year. So far in August, the Nasdaq has registered seven down days compared to three days when it closed in positive territory. During that same period, the uncertainty in the market – as represented by the Chicago Board Options Exchange’s Volatility Index – has moved from the low-20s to the mid-20s. Risk and uncertainty tend to work against M&A, either by prolonging negotiations or killing deals altogether.

Mid-Q3 M&A totals

Period Deal volume Deal value
July 1-Aug. 15, 2010 373 $16.2bn
July 1-Aug. 15, 2009 403 $11.9bn
July 1-Aug. 15, 2008 386 $18bn
July 1-Aug. 15, 2007 427 $35.2bn
July 1-Aug. 15, 2006 530 $55.5bn
July 1-Aug. 15, 2005 383 $37.9bn
July 1-Aug. 15, 2004 244 $10bn

Source: The 451 M&A KnowledgeBase

A post-IPO shopping list for QlikTech

Contact: Brenon Daly, Krishna Roy

Bucking the trend of trimmed prices and broken issues for tech IPOs, QlikTech debuted on the market Friday with a strong offering. The analytics vendor sold 11.2 million shares at $10 each, above the $8.50-9.50 range the company had set. In their Nasdaq debut, shares of QlikTech continued higher, changing hands at around $12.50 in early-afternoon trading. With 75 million shares outstanding, that gives the company an initial market capitalization of some $940m. (That’s basically spot-on to where we expected the company to begin its life on Wall Street when the paperwork first came in.)

As the proceeds from the IPO make their way to QlikTech, we’ve put together a handy-dandy shopping list for the company. Not that we necessarily expect QlikTech to immediately step into the M&A market. After all, it’s got a pretty solid business running right now. In recession-wracked 2009, QlikTech managed an impressive 33% increase in revenue. Even more impressive, the company doubled that rate in the first quarter of this year. Perhaps mindful of not messing with a good thing, QlikTech hasn’t done any deals up to now.

Nonetheless, my colleague Krishna Roy recently noted that QlikTech is essentially a one-product company that competes against the enterprise software giants that sell analytics as part of a larger product suite. (IBM, Oracle and SAP combined to snap up all three primary BI vendors in a string of deals that, collectively, set them back $15bn.) Further, one of QlikTech’s key technological advantages that the company helped pioneer (in-memory analytics) has become much more commonplace. Both of those facts turn up the competition on QlikTech, which might benefit from looking out-of-house for some additional technology.

If so, one area where we could imagine QlikTech going shopping is in the predictive analytics market. The company already offers some predictive analytics with the inclusion of advanced aggregation features in the latest QlikView 9. But additional technology could make for an easy knock-on sale to existing customers. (That’s a key for QlikTech, which gets roughly 60% of its revenue from existing customers.) Two small startups that might fit the bill for QlikTech are Revolution Analytics and Rapid-I.

Tech M&A in Q2: A clear record, but cloudy outlook

Contact: Brenon Daly

At the beginning of June, we noted that spending on tech deals in the second quarter was tracking to hit its highest quarterly level since the Credit Crisis erupted two years ago. And with the second quarter set to end later today, the period will indeed set a record, thanks largely to the return of big buyers. On a preliminary basis, we tallied $62bn worth of transactions in the April-June period. That’s basically 10% higher than the previous record, and fully twice the spending that we saw in the first three months of the year.

The new spending record – at least it’s a record in the world of the ‘new normal’ – comes despite some ominous growls from a bear market. The Nasdaq shed 10% of its value in the second quarter, finishing both May and June solidly in the red. For the past six weeks, the index has basically been lower than where it started the year.

Despite a long-standing correlation between the equity markets and M&A, spending on deals has picked up as the Nasdaq has dipped. However, where the correlation has stayed true is in the number of transactions. Activity has slowed virtually each month of the year, hitting its lowest level for 2010 in June. In fact, the monthly totals for each of the three months of the second quarter were lower than the lowest monthly total in the first quarter.

2010 activity, monthly

Month Nasdaq return Deal volume Deal value
January (5%) 296 $5bn
February 4% 278 $8.3bn
March 8% 273 $17bn
April 2% 252 $21.1bn
May (8%) 269 $19.7bn
June (5%) 249 $21.2bn

Source: The 451 M&A KnowledgeBase

What bear market?

Contact: Brenon Daly

With one month still remaining in the second quarter, we can’t help but notice that M&A spending is running much higher than it was in the first three months of the year. The total bill for tech deals in April and May hit $41bn, which is one-third higher than the $31bn we tallied for the entire first quarter. If spending continues at this pace in June, Q2 will register the highest quarterly spending total for tech M&A since the Credit Crisis.

The recent surge of spending is largely being driven by the return of the big deals. Indeed, the number of Q2 transactions is tracking to a notably lower number than the 845 deals that we saw in Q1. (In the first two months of Q2, we tallied some 500 transactions, implying about 750 for the full quarter.) But recent deals have been significant, with three of the four largest transactions for all of 2010 having been announced in April and May. Fully 10 of the 17 deals valued at $1bn or more that have been announced so far this year have come in the past two months.

Further, it’s been big-name tech buyers that have figured into the shopping spree over the past two months. SAP, IBM, Hewlett-Packard and Symantec have all announced a 10-digit transaction since the beginning of April. We would hasten to add that the companies are doing these multibillion-dollar deals despite the fact that their stocks have taken a pounding over the past two months. Shares of SAP, HP and Symantec are all down about 13% in the period. (Big Blue has shed 4%.)

The declines in the shares of three of the acquisitive tech giants are actually steeper than the 8% slide in the Nasdaq since April 1. Given the recent bear market, we would have expected M&A to tail off rather than accelerate. Similarly, we would have expected deal activity in Q1, when the Nasdaq rose 6%, to be higher than Q2, when it was down an even larger percentage. But apparently, the long-standing correlation between the stock market and M&A activity has been snapped. At least it has been for now.

Is QlikTech a billion-dollar baby?

Contact: Brenon Daly

IPOs are not what they used to be. The companies looking to go public recently have had to scale back their expectations, cutting both the amount of money they hope to raise and what they expect to be worth as they start life as a public company. The implications of these slimmed-down debuts extend far beyond the IPO candidates themselves. Smaller offerings trim the fees available for underwriters, which rely on these hotly contested mandates to offset the cost of supporting research and trading for public companies. And perhaps more alarmingly, the lower IPO valuations make it difficult for venture capitalists and other investors to realize decent returns in what was once a fairly sure path to outsized performance.

At least that’s the situation for most IPO candidates. (For instance, we’re not knocking either Meru Networks, which went public last week, or Nexsan, which is slated to come out this week, but both are valued by the market at less than $300m.) However, there are exceptions. Just as a few companies were able to make it public in 2009, while most would-be debutants just had to ride out the recession as private businesses, there will be rich valuations doled out to IPO candidates, even during this time of discounts.

From our perspective, the next player that’s likely to enjoy a warm welcome on Wall Street is QlikTech. (At $100m, the offering itself is one of the largest enterprise software IPOs in some time.) In fact, if we pencil out the initial valuation for this fast-growing, profitable analytics provider, we come up with a number that’s in the neighborhood of $1bn. QlikTech may not hit that magical mark on its debut, but we suspect that it won’t fall too far below it. Look for our full report on the company and the offering, including our projected financials and valuation for QlikTech, in tonight’s Daily 451 sendout.

Nexsan: Next to go out

Contact: Brenon Daly

Nearly two years after it first filed its IPO paperwork, storage vendor Nexsan appears set to hit the Nasdaq later this week. The company is planning to sell 4.8 million shares at $10-12 each. At the high end of the range, the offering would raise some $59m for Nexsan, which would start life as a public company with an initial valuation of about $200m. Thomas Weisel Partners is running the books for Nexsan, which will trade under the ticker NXSN.

The offering continues the trend of smaller IPOs and lower initial valuations that we recently noted. Back in April 2008, Nexsan planned to raise $81m in its offering. However, the actual proceeds will come in about one-quarter below its original expectation. Similarly, the valuation that we penciled out for Nexsan two years ago has proved a bit too rich.

Back in our initial report on the company, we figured that Nexsan would hit the market at a valuation of around $300m. Built into that projection, however, was the assumption that the storage vendor would be able to increase revenue at about a 20% clip. (That didn’t seem unreasonable back in 2008, considering Compellent Technologies – a similar storage startup that had recently gone public – increased revenue 78% that year.)

Instead, Nexsan actually shrank. In its fiscal year that ended June 30, 2009 – a period that basically covers the recent ‘Great Recession’ – overall sales slipped to $61m from $63m in the previous fiscal year. In the two quarters since then, Nexsan has started to grow again, although at a rather muted 6% pace. On the other hand, Nexsan did manage to move into profitability during the worst economic conditions that most US businesses have seen.

A rebound, but still short

Contact: Brenon Daly

Chordiant Software’s $161.5m sale to Pegasystems, which was announced on Monday and is expected to close next quarter, marks the 10th time this year that a company listed on the NYSE or Nasdaq has been set up to be erased from one of the exchanges. Granted, not all of the announced deals will get closed (Upek’s unsolicited bid for publicly traded rival AuthenTec comes to mind), and not all of the bids will play out smoothly (the hedge fund agitation against Novell, for instance), but it does indicate a rebound in activity from this time last year.

With the recession crippling the economy in early 2009, stock prices for many tech companies sank to their lowest level in more than a half-decade. (The Nasdaq bottomed out in early March 2009 at just under 1,300. The index closed Monday at 2,362 – some 80% higher than it was a little over a year ago.) In the first few months of 2009, few companies were in the mood to talk M&A. Buyers were worried about their own outlook, and figured they had enough risk in their own operations without compounding that with a big buy. On the other side of the table, few sellers were willing to part with their businesses at what they considered bargain prices. Consequently, deal flow dried up.

What’s interesting to note is that although the equity market has rebounded so far in 2010, we’re basically seeing the same pace of deals. There were 10 acquisitions of US-listed public companies in the first quarter of 2009 – the same number that we’ve seen so far this year. Yet spending on the deals has surged more than four-fold. Clearly, that’s an indication that buyers are more confident about the outlook for business and are willing to place larger bets on acquisitions. And while that pickup in spending has been welcome, we need to keep in mind that it’s still chump change compared to when the M&A market was more vibrant. Spending on public company deals announced so far this year ($7.5bn) is less than one-quarter the level that it was in both 2008 and 2007.

First-quarter Nasdaq/NYSE M&A activity

Period Deal volume Deal value Select transactions
Q1 2010 10 $7.5bn Elliott Associates-Novell; Pegasystems-Chordiant
Q1 2009 10 $1.8bn Autonomy Corp-Interwoven; Exar-Hifn
Q1 2008 19 $34.3bn Oracle-BEA Systems; BMC-BladeLogic
Q1 2007 21 $33.3bn Oracle-Hyperion; Cisco-WebEx

Source: The 451 M&A KnowledgeBase

Correlated markets?

Contact: Brenon Daly

To look at the recent performance of the Nasdaq, you’d hardly know that capitalism (as we know it) almost died a year ago. The tech-heavy index was largely unchanged on Wednesday but has posted gains for three straight sessions, having added 9% so far in September. That’s part of a longer run that has seen the Nasdaq tack on 35% since the beginning of 2009 and 70% since bottoming out in early March. In fact, the index is essentially where it was a year ago, before banks started going under, the credit market froze and the US government fired up its printing presses to give us all enough money to buy our way out of the recession.

The optimism that’s been boosting the equity markets is starting to carry over to the M&A market, with several signs from big-time buyers pointing to a return to health:

  • Dell’s recent reach for Perot Systems stands as the largest tech transaction in five months.
  • Google inked its second acquisition in as many months, after being out of the market for nearly a year. (The search giant added reCAPTCHA last week after picking up On2 Technologies in early August, its first purchase of a fellow public company.)
  • Adobe and CA Inc announced their largest deals in four-and-a-half years and three-and-a-half years, respectively, in the past week.
  • Microsoft grabbed a bucketful of small companies to add technology to its ERP division, a business that has largely been shaped by a pair of billion-dollar buys earlier this decade.

Of course, we need to consider this resurgence of deal flow in the context of an overall sluggish M&A market. With a week and a half left in the third quarter, spending on deals is running at just $28bn. While that would put activity roughly on par with where it was last year, it is only half of the amount of third-quarter spending in 2007 and one-third of the total in Q3 2006. Another way to look at it: the roughly $84bn that we’ve seen so far for all of 2009 is basically what we used to see in a single quarter during the boom years.

Q3 tech M&A activity

Period Deal volume Deal value
Q3 2009 (through August 22) 672 $27bn
Q3 2008 733 $32bn
Q3 2007 825 $58bn
Q3 2006 1,029 $102bn
Q3 2005 811 $87bn

Source: The 451 M&A KnowledgeBase

Q2 earnings to shape Q3 M&A

-Contact Thomas Rasmussen, Xiaoyue Ma

Is there a correlation between the equity markets and M&A? Anecdotal evidence sure seems to suggest so. After a hot start to the second quarter for both the stock market and deal flow, tech M&A slowed as the Nasdaq cooled in recent weeks. In fact, spending on deals in June was less than half the level that it was in both April and May. Many would-be buyers now seem to be looking to earnings season – both for a report on second-quarter results and the outlook for the balance of the year – to determine if they’ll be going shopping again. We have heard this throughout the year from companies that have both the means and the desire to shop, but have refrained from any meaningful deals because of the uncertain outlook.

That sentiment was clearly evident when we tallied the results of our June survey of corporate development executives, who are pretty much the only acquirers in today’s market. When we analyzed the findings and separated respondents at large firms from those at smaller ones, almost two-thirds of large buyers predicted they will be more acquisitive in the second half of 2009. This stands in stark contrast to the results of our survey conducted last December, in which large acquirers were significantly more bearish on M&A, with less than one-third of respondents indicating they would do more purchases. We should note that the June survey was done when the Nasdaq was trading at its highest level since last October, while the December survey was done at a significantly more bearish time.

Given that there hasn’t been a raft of negative pre-announcements by tech vendors so far, second-quarter results may well come in somewhat stronger than many expect. In fact, tech bellwethers IBM and Google, up 20% and 30% year-to-date, respectively, will report after the bell Thursday and the overall consensus seems to be positive. Big Blue recently reiterated its fiscal year forecasts of at least $9.20 and $10-$11 in earnings per share for 2009 and 2010, respectively. If the tech earnings season does indeed go smoothly, we would anticipate companies to pick up their pace of acquisitions.

Drawing the line between M&A and the equity markets

Period M&A spending Nasdaq median Nasdaq median % change from prior month
October 2008 $20bn 1,711 N/A
November 2008 $13bn 1,532 -10.47%
December 2008 $7bn 1,531 -0.05%
January 2009 $3bn 1,521 -0.70%
February 2009 $2bn 1,494 -1.72%
March 2009 $4bn 1,444 -3.35%
April 2009 $21bn 1,646 13.97%
May 2009 $17bn 1,731 5.17%
June 2009 $10bn 1,832 5.84%
July 2009 N/A 1,787 -2.45%

Source: The 451 M&A KnowledgeBase and the Nasdaq

Imaging an alternative exit for LogMeIn

Contact: Brenon Daly

With LogMeIn set to price its IPO later today, the next ‘buyer’ of the company will be public market investors. The on-demand vendor will sell 6.7 million shares in an offering that’s being led by JPMorgan Chase and Barclays Capital. LogMeIn set an initial range of $14-16 per share, implying a market capitalization of $300m-340m. It will likely price above that range, and we expect strong demand for LogMeIn shares once they start trading under the ticker ‘LOGM’ on the Nasdaq.

As the company gets set to realize that exit (after more than 17 months on file with the US Securities and Exchange Commission), we thought about where it might have looked had it opted for the other possible exit, a trade sale. We’re not suggesting that LogMeIn was dual-tracking by any means. In fact, although it kept its S-1 alive while so many other tech companies pulled their IPO paperwork, that move wasn’t driven by desperation. LogMeIn doesn’t actually need the proceeds. It is heading into the offering with no debt and $27m in cash on its books, having generated cash for the past nine quarters. Even on a GAAP basis, the firm has been profitable for the past three quarters.

Thus, LogMeIn doesn’t need the offering any more than it needs a trade sale. And to be clear, we hadn’t heard that the company was pursuing anything other than an IPO. Nonetheless, as we did some blue-sky thinking, we quickly came up with two deep-pocketed companies that would have been very smart to nab LogMeIn before it went public. Keep in mind, too, that the two primary rivals to LogMeIn are GoToMyPC and WebEx Communications, firms that have been snapped up by tech giants Citrix and Cisco, respectively.

So here’s our hypothetical short list of possible buyers for LogMeIn. Symantec already has several products that compete with LogMeIn (notably, PC Anywhere), but it is a key partner for LogMeIn. And Big Yellow has shown that it is ready to go shopping to bolster its software-as-a-service business. It paid $695m, or almost 5x trailing 12-month sales, for MessageLabs last October, its largest deal in more than a year and a half. Alternatively, Dell knows all about picking up companies just before they go public. It paid a double-digit multiple for its push into storage with the $1.4bn EqualLogic purchase in November 2007. However, Dell has also done a quartet of deals to build out its services offerings, some of which are offered by LogMeIn and others that are complementary. In addition, the customer profiles of the two vendors would synch pretty well, since LogMeIn gets roughly 80% of its revenue from the SMB market.