Starent gets a bit more pop than most Cisco buys

Contact: Brenon Daly

Announcing its second multibillion-dollar acquisition in as many weeks, Cisco Systems said Tuesday that it will hand over $2.9bn in cash for Starent Networks. The pickup comes just after the networking giant’s reach across the Atlantic for Norwegian videoconferencing vendor Tandberg. Cisco is paying $3bn in cash for Tandberg. Both of the October purchases are expected to close in the first half of 2010.

As many echoes as there are between this pair of recent deals, there’s one significant difference: Cisco is paying a premium on Starent’s stock price that’s substantially higher than what it paid for Tandberg. In fact, Cisco is paying nearly twice the premium for Starent than it has paid in its other recent purchases of public companies. The bid of $35 for each Starent share represents a 42% premium over the closing price 30 days ago for shares of the wireless infrastructure provider. That compares to a 27% premium for Tandberg, a 21% premium for WebEx Communications and a 23% premium for Scientific-Atlanta. (All of those calculations are based on the closing prices of the shares of the target 30 days prior to the acquisition, which we feel is a more accurate snapshot of the company than the previous day’s closing price.)

And a final echo in today’s acquisition of previous Cisco deals: the advisers. Barclays Capital worked for Cisco, while Goldman Sachs Group banked Starent. That’s the same banks on the same sides as Cisco’s pickup of WebEx two-and-a-half years ago. Of course, that was before Barclays acquired Lehman Brothers, which actually got the print.

Brocade on the block? Of course it is

Contact: Brenon Daly, Simon Robinson

Having recently marked the anniversary of its largest-ever acquisition, Brocade Communications may now find itself on the other side of a transaction. At least that’s the speculation from The Wall Street Journal, which reported Monday that the storage and networking giant has retained a banker (reportedly Frank Quattrone’s Qatalyst Partners) to shop it. While the report was enough to goose the stock to its highest level since June 2008 (shares were up 15% to $8.82 in Monday-afternoon trading), it’s worth pointing out that being shopped is a long way from getting sold.

It’s also worth mentioning that speculation about Brocade being in play is nothing new. As my colleague Simon Robinson noted in late March, the consolidating networking landscape makes Brocade a likely target. (After all, Brocade itself is an example of the consolidation. A traditional SAN networking provider, Brocade spent $2.6bn to expand into IP networking with its landmark purchase of Foundry Networks.) In the report, Robinson taps IBM as a likely buyer for Brocade as a way to gain an immediate presence in the networking space as well as strengthen its lead in the server sector. (Big Blue is one of the largest of Brocade’s OEM partners, which now number 23 companies.)

Hewlett-Packard is a less likely acquirer, in our view, because of the substantial overlap between HP’s newly reinvigorated ProCurve line and Foundry. That said, Brocade is a key supplier of datacenter infrastructure technology, so it is likely to be of interest to sever vendors like HP. Brocade’s appeal might be even sharper now that HP and Cisco Systems, which were once chummy, have found themselves on opposing sides in their efforts to equip the modern datacenters.

One additional buyer that certainly makes sense for Brocade, even more so because of a recently strengthened OEM arrangement, is Dell. The hardware provider, which has already bought its way into storage and other IT infrastructure markets, recently bolstered its OEM arrangement with Brocade to include IP networking and fiber-channel-over-Ethernet gear. (For the record, the WSJ article doesn’t mention Dell as a possible acquirer but, inexplicably, includes Oracle as a suitor. We suspect that Larry Ellison has plenty of other areas of software to consolidate before a hardware-heavy purchase that pits Oracle against Cisco.)

In terms of valuation, we would note that with the M&A-inspired speculative buying, Brocade shares have more than tripled so far this year. (Trading in Brocade stock through mid-Monday was already more than five times heavier than average.) The run has given Brocade an enterprise value (EV) of $4bn, including the jump on Monday. That values it at almost exactly the same level as Cisco on an EV-to-trailing-EBITDA valuation and a slight discount to the networking giant on an EV-to-trailing-sales multiple.

A happy anniversary for Brocade-Foundry

Contact: Brenon Daly

As far as Wall Street is concerned, nothing has really happened to Brocade Communications over the past year. Shares in the storage and networking vendor trade exactly where they did this time last July. And yet, there have been monumental changes at the company during that time. Exactly a year ago today, Brocade announced its largest and riskiest deal: the $3bn purchase of Foundry Networks. The transaction faced a number of challenges, both in terms of strategy and execution. And compounding those difficulties was the fact that Brocade would be closing the acquisition during the most severe economic slowdown since the Great Depression.

For starters, Brocade was planning to borrow some $1.4bn of the $3bn purchase price. In normal times, that wouldn’t be a problem for a cash-producer like Brocade. But with the credit markets frozen last fall and people wondering about the economic outlook, borrowing seemed unlikely. (The uncertainty around the economy led the two sides to trim the final purchase price to just $2.6bn in late October; the transaction closed in mid-December.) Beyond the question of financing the pickup, folks questioned the wisdom of a deal that would move the combined company even more directly into competition with Cisco Systems, the most successful networking vendor of the modern era.

That thought certainly spooked investors. As soon as the pairing was announced, Wall Street knocked some 20% off Brocade shares and continued to put pressure on them well into this year. At their lows in early March, Brocade shares had lost some three-quarters of their value since the announcement of the acquisition. (That compares to a 40% decline in the Nasdaq during the same period.) The slide left Brocade in the absurd situation of sporting a market capitalization of just over $800m, despite tracking to generate about $1.9bn in sales in the current fiscal year. It was also a rather damning assessment of the Foundry buy, given that Wall Street was valuing the combined Brocade-Foundry entity at just one-third the amount that Brocade had valued Foundry.

It turns out that the market dramatically undervalued Brocade. Since bottoming out, its shares have quadrupled, giving the vendor a current market capitalization of $3.4bn. That run has left Brocade shares flat over the past year, while the Nasdaq is down some 18% during that time. Brocade has also slightly outperformed rival Cisco over the past year.

Wall Street seems to be digesting the fact that Brocade may actually be able to survive – even thrive – in its fight with Cisco. (For its part, Cisco hasn’t been helping its own cause. Recent actions, including introducing a new server offering, have created more enemies than friends.) Meanwhile, Brocade has integrated Foundry a quarter or two earlier than planned and has been pitching itself as a viable alternative to the giant. Despite a tough beginning, that message is starting to resonate with customers.

Broadcom-Emulex: Failure rewarded?

Contact: Brenon Daly

Is this a case of the market rewarding failure? Since Broadcom unveiled its now-aborted bid for Emulex, shares of both companies have outperformed the Nasdaq. That bull run stands in sharp contrast to the performance of firms that have been involved in other unsolicited efforts, as we noted when Broadcom first started squeezing Emulex. Broadcom took its unsolicited offer public for its fellow southern California-based vendor on April 21. Initially, Broadcom was set to hand over $9.25 in cash for each share of Emulex, although last week it bumped the bid up to $11 per share. That’s not a bad premium for Emulex, which had spent much of the year trading at around $6.

Of course, it’s not surprising that Emulex shares would be trading higher, given the ‘floor’ valuation that Broadcom put on the company. (On Friday morning, Emulex stock was changing hands at around $9, just slightly below Broadcom’s opening bid.) On the other side, Broadcom stock has slightly outperformed the broader market over the two and a half months that it has been trying to land Emulex. On Thursday, Broadcom gave up its effort. In a brief release explaining the abandoned bid, Broadcom CEO Scott McGregor said the company would now look at other ‘value-creating alternatives.’ Like, say, an unsolicited run at another company?

Is Riverbed the next Data Domain?

Contact: Brenon Daly

With Data Domain off the market, we did a bit of blue-sky thinking about which company might find itself snapped up in a similar scenario. Our pick? Riverbed Technology. We’re not suggesting that the vendor is in play by any means, but hear us out on this one.

For starters, both Data Domain and Riverbed are fast-growing, single-product companies in markets that are dominated by mature technology vendors that have deep pockets and are hungry for growth. In the case of Data Domain it’s the storage market, while for Riverbed it’s the networking market. (To put some numbers around the differences, consider that Data Domain more than doubled its revenue in 2008, while its acquirer, EMC, saw storage revenue inch up just 10% last year.)

The obvious buyer of Riverbed would be Cisco. That’s so obvious, in fact, that we heard Cisco made at least two overtures to Riverbed before the company went public in September 2006. (However, one source characterized Cisco’s interest more as ‘industrial espionage’ than acquisition negotiations.) So we don’t see Riverbed going to Cisco. Instead, we like Hewlett-Packard as the acquirer of Riverbed.

The two companies have been friendly for years. HP originally had an OEM deal with Riverbed, and later resold the Riverbed product. HP has also integrated the Riverbed Optimization Software into its ProCurve infrastructure. To be clear, we’re not suggesting that there’s anything more than technology talks between the two sides right now. But if HP wanted to bolster ProCurve, picking up Riverbed would do that. Plus, such a deal could help HP stick it to Cisco, which took a swipe at HP earlier this year by jumping into the server market. Maybe HP is interested in countering with a big buy into one of the fastest-growing segments of the networking market.

Meru: Nasdaq or bust

At the rate networking companies are consolidating, there may be no one left to buy Meru Networks. Earlier this week, Hewlett-Packard satisfied its appetite for WLAN equipment by acquiring Colubris Networks. That deal comes just two months after rival Trapeze Networks got snapped up by Belden, a cable and wiring company.

But the deal that probably scotched any potential trade sale for Meru was Brocade’s $3bn gamble on Foundry. The reason: Foundry has an OEM arrangement with Meru and was viewed as the most-likely acquirer of the WLAN equipment startup. We’re guessing Brocade probably figures it has its hands full with integrating Foundry’s existing business without adding additional pieces. Also, we view the planned Brocade-Foundry pairing as focused primarily on the datacenter, which wouldn’t have much use for WLAN equipment.

The only suitor we can put forward for Meru at this point is Juniper Networks. While Meru’s enterprise focus would fit well with Juniper, we understand the two companies kicked around a deal in 2005, at a reported $150m, but talks didn’t go far. Besides, a Meru source indicated recently that the company is plugging away on an IPO for next year. (We’ve heard that from the company for more than two years , but maybe 2009 will be the year.)

For Meru to go public at a decent valuation, however, it needs both a healthy IPO market and a healthy comparable, Aruba Networks. That company is currently trading at half the level it was at the start of the year, following a blown quarter in February. Aruba will have a chance to make amends in two weeks, as it will report results from its fiscal year on August 28.

Recent WLAN deals

Date Acquirer Target Price
Aug. 2008 HP Colubris Not disclosed
June 2008 Belden Trapeze Networks $133m
July 2008 Motorola AirDefense $85m*

Source: The 451 M&A KnowledgeBase

Cisco’s M&A machine unplugged

While Brocade Communications has used its $3bn purchase of Foundry Networks to turn up the pressure on Cisco Systems, we would quickly add that Cisco itself has hardly used M&A at all this year. Typically one of the busiest corporate acquirers, Cisco has averaged about a deal per month in recent years. However, so far this year, the networking giant has acquired just one company, DiviTech. (In addition to last month’s purchase of the tiny Danish company, the only other announced move in 2008 was snapping up the 20% stake in its subsidiary Nuova Systems that it didn’t already own.)

Earlier this year, we noted that Cisco was rumored to be making a run at Citrix. Although that speculation initially helped boost Citrix shares, they have since sunk to a 52-week low. The decline over the past three months has shaved a half-billion dollars off Citrix’s market capitalization, representing a decent ‘rebate’ for any acquirer of the infrastructure software vendor. It currently sports a $5bn market capitalization. In the past, Cisco has shown itself ready to seal multibillion-dollar deals, including its $6.9bn purchase of Scientific-Atlanta in late 2005 and its $3.2bn acquisition of WebEx Communications in March 2007. Cisco is slated to report its fiscal 2008 results in two weeks.

 Cisco’s disappearing deals

Period Deal volume Deal value Notable acquisitions
Jan. 1 – July 21, 2005 7 $899m FineGround Networks, Airespace, Topspin Communications
Jan. 1 – July 21, 2006 4 $143m Meetinghouse Data Communications, SyPixx Networks
Jan. 1 – July 21, 2007 9 $4.2bn WebEx Communications, IronPort Systems, Neopath Networks
Jan. 1 – July 21, 2008 1 undisclosed DiviTech

Source: The 451 M&A KnowledgeBase

NetQoS: a small buy on the way to a sale

On its way to a probable public offering next year, NetQoS has acquired a startup that will boost the company’s offering to the financial services industry. On Tuesday, NetQoS said it’ll pay a small amount of cash for Helium Systems, which makes trade monitoring software. (Helium isn’t expected to add much revenue to NetQos, which has been tracking to $60m this year, up from $45m in 2007.)

Indeed, organic growth has been the story at NetQoS, since the Helium acquisition is the first by the company in nearly two-and-a-half years. But the pace may be about to pick up. The reason? As it gets ready to put together an underwriting ticket for an IPO down the road, NetQoS has found (surprise, surprise) that bankers are also pitching other deals. Meanwhile, for its part, the company has started to look at ways to fill up its corporate coffers if it finds a deal that’s too good to pass up.

Thus far, NetQoS has been remarkably conservative in its capitalization, raising just $21m total. (Liberty Partners, a New York PE firm that typically invests in midmarket companies, is the majority owner of NetQoS and the company’s only institutional investor.) NetQoS, which has been cash-flow positive since 2005, hasn’t taken any outside money in a half-decade. But with an IPO payday likely in 2009, we’re guessing NetQoS wouldn’t have any trouble lining up funds, either from its current backer or even a new partner. 

NetQoS acquisitions

Date Target Rationale
June 2008 Helium Systems Trade monitoring
Dec. 2005 Pine Mountain Group Services
April 2005 RedPoint Network Systems Device management

Source: The 451 M&A KnowledgeBase