Slimmed-down LSI catches eyes on Wall Street

Contact: Brenon Daly

Wall Street’s vote on NetApp’s purchase of the Engenio division from LSI is pretty clear: the seller got the better end of the deal. On an otherwise tough day on the market Thursday, LSI shares were one of the rare spots of green on trading screens as investors backed the company’s move to focus more on its chips business. The stock closed up 3%, with volume was more than twice as heavy as average. On the other side, NetApp slumped 6% on trading that was four times heavier than a typical day.

The reaction comes after LSI, advised by Goldman Sachs, announced plans after the closing bell Wednesday to sell its Engenio external storage systems business to NetApp for $480m in cash. (Over the past decade, LSI had several plans to spin off that unit in an IPO, but never managed to get it done.) The deal, which is expected to close within 60 days, continues a run of divestitures that LSI has undergone, including shedding divisions serving mobility and consumer products.

We would note that Engenio is garnering a valuation of just 0.7 times sales, a smidge below the more typical 1x sales seen in many divestitures. (For instance, when LSI shed its mobility products unit in mid-2007, that business garnered 1.2x trailing sales.) Still, the discount doesn’t seem to have mattered to Wall Street.

NetApp: Single and lovin’ it

Contact: Brenon Daly

Jilted earlier this summer, NetApp is nonetheless doing just fine on its own, thank you very much. Shares of the storage giant are now changing hands at their highest level in more than two years, giving the company a market capitalization of a cool $10bn. (The stock tacked on 4% on Thursday after NetApp topped Wall Street expectations for its fiscal second-quarter results and indicated that its current quarter is shaping up stronger than investors initially projected. Shares closed up $1.21 at $30.83 Thursday in an otherwise down day for the market.)

Thursday’s move higher continues a recent bull run for NetApp shares since the firm got elbowed aside by EMC in the fight over Data Domain. In the six months since NetApp unveiled its unsuccessful bid for the data de-duplication specialist, shares of NetApp have soared 70%. (In comparison, the winner in the bidding war, EMC, has returned ‘only’ 40% over that period.) We mention the relative performance of the shares of the two vendors because originally, NetApp planned to use its equity to cover slightly more than half the cost of Data Domain. (With its deeper pockets, EMC always planned to pay all cash for Data Domain, as it did when it wrapped up the acquisition in late July.)

So, from the outset, we agree that our back-of-the-envelope calculation is a bit academic, given that the Data Domain deal has been done and dusted for nearly four months. (And we’ll acknowledge that it’s a bit inexact because NetApp never formally announced the precise amount of stock, or even the specific conversion price, that it planned to use.) Nonetheless, it’s pretty clear that Data Domain owners would have done pretty well if they had taken NetApp equity. (Of course, shareholders did just fine with the $33.50 in cash from EMC, which, at 7.4 times trailing sales, was the highest multiple paid for a US-listed public company since March 2008.)

With all of those disclaimers, here’s our math: When NetApp first announced the bid on May 20, its shares traded at about $17.30 each. Although it didn’t reveal the exact breakdown of cash and stock in its offer, which had an equity value of $1.75bn, we understand that NetApp was planning to hand over about $800m in cash and cover the remaining $950m in equity. Assuming that’s roughly the breakdown, that same chunk of NetApp stock would now be worth about $1.8bn – more than the full value of its initial cash-and-stock offer. Add the $800m in cash into the mix, and the total consideration for Data Domain (based on NetApp’s current share price) hits $2.6bn. That’s roughly $300m more than EMC ended up paying for Data Domain.

Rumor mill churning on CommVault

Contact: Brenon Daly, Henry Baltazar

To paraphrase Mark Twain, a rumor can travel halfway around the world while the truth is still putting on its shoes. At least that’s the case with M&A gossip right now. Rumors are flying, in many cases given wing by some of the unusual multibillion-dollar pairings that have popped up in recent weeks. Who would have thought, for instance, that Cisco would have gone shopping in Norway (of all places) to ink its largest deal in a year and a half? And who would have picked Dell as the buyer for Perot Systems? (Except for that guy who traded Perot options on inside information, that is.)

All uncertainty, of course, serves as fertile ground for speculation and rumors. Earlier this week, The Wall Street Journal reported that Brocade Communications may have selected a banker to help it with a sale. While we’ve noted in the past that Brocade is likely to get snapped up, we have our doubts that anything is imminent. (And we doubt even more that Brocade would ever end up at Oracle, as the WSJ speculated.) But since we love rumors as much as the next person, we figured we’d pass along one that we’ve heard making the rounds this week: CommVault may be in play, with NetApp as the possible buyer.

We’ve mulled over a CommVault-NetApp pairing in the past, most recently after the storage giant lost the bidding war for data de-duplication specialist Data Domain this summer. But we’ve never felt that the two companies fit tightly together all that well. (Still, one recent competitive development may spur NetApp to make a move. Symantec, which had been a longtime partner of NetApp, rolled out its own NAS software offering. To counter Symantec’s move on its turf, NetApp could use the archiving and de-dupe offering that would come with CommVault. Whether that’s enough to drive a deal, well, we’re not so sure.)

There are still a lot of differences between the two companies. For starters, CommVault pretty much sells straight software, while NetApp wraps its IP in hardware. (Further, its boxes are at least partly an alternative to CommVault’s offering.) Also, CommVault, while now targeting enterprise sales, primarily pursues the low end of the market while NetApp sells at the high end. Add to that a newly appointed chief executive who might want to actually move into the corner office before making an acquisition that would (for good or ill) reshape the company irrecoverably, and we just don’t see NetApp reaching for CommVault.

Instead, we have our own leading candidate for CommVault: Dell. On the heels of its purchase of Perot, Dell went out of its way to say that it was still very much planning to do deals, and storage has been a focus of its shopping in the past. CommVault and Dell already have an OEM arrangement and share thousands of customers. The fact that CommVault recently rolled out a relatively low-cost de-dupe offering would make it even more attractive to Dell, we suspect. CommVault, which is solidly profitable, has a market capitalization of $870m but holds about $120m in cash, lowering its enterprise value to just $750m.

Advisors in EMC-Data Domain: a chorus and a solo

Contact: Brenon Daly

It’s often said that there are three types of falsehoods: lies, damn lies and statistics. To that list, we might be tempted to add a fourth category: league tables. That’s in the front of our minds because we just put together our mid-2009 update to the rankings of the busiest tech banks. (For those curious, Credit Suisse Securities took the top honor, with more deals and more dollars advised than any other bank. Banc of America Securities and JP Morgan Securities rounded out the podium.)

To be clear, we’re not saying that banks make up deal credits. Instead, we’re just noting that the credits, like statistics, may be more malleable than most people think. As we tally the transactions to come up with our rankings, there are invariably deals that smack of a little gamesmanship. In this case, it’s the chorus of advisers for EMC in the storage giant’s purchase of Data Domain. No fewer than eight banks – ranging from bulge brackets to a high-end boutique to even a midmarket firm – are all claiming credit for EMC. (We confirmed, indirectly, with EMC that each of the banks did indeed play a role in the acquisition.)

Meanwhile, on the other side, boutique advisory firm Qatalyst Group took sole credit for working the sell-side for Data Domain. Some observers initially dinged Frank Quattrone’s shop for running such a narrow process. (We understand, for instance, that EMC didn’t see the initial book on Data Domain when NetApp was preparing its bid.) Whether that’s the case or not is largely academic at this point, since the transaction closed a week ago. And it’s largely irrelevant, given where the deal was ultimately done. Data Domain enjoyed the richest price-to-revenue multiple in the sale of a US public company since March 2008.

UPDATE: After initially publishing this piece, Bank of America Merrill Lynch reached out to us to say that they, too, should have a deal credit for advising EMC. For those of you keeping score at home, that brings the total number of advisors for EMC, which was working to land Data Domain for all of two months, to nine separate banks.

With Data Domain done, what’s next for NetApp?

Contact: Brenon Daly, Simon Robinson

Data Domain was originally slated to report second-quarter earnings later this afternoon. Instead, the data de-duplication specialist is done as as an independent company, with the acquisition by EMC for the princely sum of $2.3bn closing today. The deal looks even ‘princelier’ when we consider the markdown M&A that we’ve been seeing recently. In fact, EMC’s bid values Data Domain at 7.4 times its trailing 12-month (TTM) revenue. That’s the richest multiple paid for a US public company since March 2008, when Ansys paid 8.2 times TTM sales for Ansoft.

Assuming the deal does indeed go through as expected, we wonder what will happen with the vendor that originally put Data Domain in play, NetApp. Certainly, the proposed pairing, which was approved by the boards at both firms, would have been a boost for NetApp. The storage system giant could certainly benefit from a midrange de-dupe product to serve customers beyond its existing base, which is precisely what Data Domain would have provided. The head of our storage practice, Simon Robinson, recently speculated that NetApp may well target other de-dupe providers. None of the potential candidates appears to fit as cleanly into NetApp as Data Domain would have, but there are nonetheless cases to be made for both CommVault and ExaGrid Systems.

While CommVault does indeed offer de-dupe technology, its backup software would pose a tricky integration challenge for NetApp, which sells appliances as an alternative to traditional backup software. (Keep in mind, too, that NetApp’s M&A track record hardly inspires confidence.) Meanwhile, ExaGrid is a company that in many ways has shaped itself in the image of Data Domain, albeit while selling de-dupe appliances. Buying ExaGrid wouldn’t bring NetApp the same heft as picking up Data Domain, but it would fit nicely into its focus on the SME market. If nothing else, NetApp could put some of the windfall of the $57m breakup fee that it received from the Data Domain deal toward another de-dupe move.

Data Domain: Battle at Centre Court

Contact: Brenon Daly

A long, drawn-out battle – with back-and-forth volleying – to claim a coveted prize. We could be talking about the amazing men’s final at Wimbledon over the weekend, but since we’re back in the office, we’re actually referring to the ongoing fight over Data Domain. On Monday, EMC served up what it hopes will be an ace. It raised its existing all-cash offer for the data de-duplication specialist to $33.50 per share.

EMC’s latest bid values Data Domain at roughly $2.3bn, richer than its previous offer as well as the one from original suitor NetApp. Recall that NetApp served first, offering $1.75bn in cash and stock for Data Domain on May 20. EMC returned that with a $2.1bn bid of its own a week and a half later. And now, EMC has knocked a shot that, honestly, we feel NetApp will have trouble stretching to get. Our view: Advantage EMC.

A ‘feature rich’ bidding war for Data Domain

Contact: Brenon Daly

A multibillion-dollar bidding war over a technological feature? As crazy as it sounds, that’s one way to look at the contested effort to acquire Data Domain. (Obviously, the company offers much more than the data de-duplication technology that it’s known for. But some rivals – and even one of its current suitors – have nonetheless dismissed Data Domain as a ‘feature’ in the past.) EMC on Monday topped NetApp’s two-week-old agreement to pick up Data Domain.

Even though EMC raised the bid on Data Domain to $30 in cash for each share, the market is clearly expecting more. In mid-afternoon trading Tuesday, Data Domain shares were changing hands at $31.27 – roughly 4% above EMC’s offer. NetApp, which originally offered $25 in cash and stock for each share of Data Domain, hasn’t yet responded to EMC’s move. (As an aside, the bid-and-raise for Data Domain came just hours after we noted bidding wars for two other public companies.)

EMC entering the fray for Data Domain isn’t surprising. According to its offer to purchase the company filed with the US Securities and Exchange Commission, EMC planned to discuss an acquisition with Data Domain in early May, but the target cancelled the meeting. Only a few days later, NetApp, which is being banked by Goldman Sachs, announced its bid for Data Domain, advised by Qatalyst Partners. At this point, EMC hasn’t formally retained a banker to advise it on landing Data Domain (much to the dismay of fee-hungry bankers everywhere). Incidentally, speaking of Qatalyst, the boutique officially announced that it has hired former Goldman Sachs software banker Ian Macleod, which we heard about more than two months ago.

Just how far has the CDP market fallen?

by Brenon Daly, Henry Baltazar

In the days before the big storage vendors turned continuous data protection (CDP) into a feature rather than a stand-alone product, investors in CDP startups could still make decent returns. Both Kashya and Topio raised about $20m in VC backing, and ended up exiting for eight times that amount. Kashya sold to EMC for $153m in cash in May 2006 while Topio, which wisely blended CDP with heterogeneous replication in its offerings, went to NetApp for $160m in cash a half-year later. (Of the two deals, NetApp-Topio has been the underwhelming transaction. NetApp recently shuttered the SnapMirror for Open Systems product line that it picked up with Topio.)

Since those paydays, however, CDP valuations have plummeted. Symantec acquired assets of Revivio for an estimated $20m in November 2006, while Double-Take Software handed over just $8.3m for TimeSpring Software in late 2007. But even those deals seem rich when we consider BakBone Software’s recent reach for CDP startup Asempra Technologies. Under terms of the deal, BakBone is shelling out just $2.1m for Asempra, which had raised $36m from its backers. To add insult to injury, BakBone is paying for the acquisition mostly in equity, with $1.7m of the price tag covered by its illiquid, Pink Sheets-traded paper. We would note that Asempra’s owners are getting 3.8 million shares of BakBone, which typically only trade about 30,000 shares each session.

Select CDP transactions

Date Acquirer Target Price
May 2009 BakBone Software Asempra Technologies $2.1m
December 2007 Double-Take Software TimeSpring Software $8.3m
November 2006 Symantec Revivio $20m*
November 2006 NetApp Topio $160m
May 2006 EMC Kashya $153m
March 2006 Atempo Storactive Not disclosed

Source: The 451 M&A KnowledgeBase *451 Group estimate