LANDesk nearly done

Contact: Brenon Daly

After a nearly half-year process, Emerson Electric is close to having LANDesk off its books. Emerson, which picked up the systems management vendor when it acquired Avocent for $1.2bn last fall, classifies LANDesk as a ‘discontinued operation’ and hired Greenhill & Co to advise it on the divestiture. We understand that final bids are being submitted right now, and a deal announcement is expected in two weeks or so.

Although it’s unclear who will end up with LANDesk, several sources have indicated that the buyer is likely to be another company, rather than a buyout shop. (Corporate castoffs often land in the portfolios of PE firms for a period of ‘rehabilitation’ before being snapped up by another company. Indeed, that was the path for LANDesk, which was sold off by Intel in 2002 to a pair of PE buyers, Vector Capital and VSpring Capital, before being bought four years later by Avocent.) Of course, a PE buyer could pair the LANDesk property with an existing portfolio company to enjoy some of the cost savings that generally allow strategic buyers to outbid pure financial buyers.

In an earlier report, my colleague Dennis Callaghan highlighted a few potential buyers for LANDesk, including virtualization vendors, hardware companies and security firms. However, we understand that the obvious suitors in those sectors are no longer in the process: VMware and Lenovo, both of which have key partnerships with LANDesk, are said to have moved on.

Another corporate buyer that we can scratch off the list? Novell. Apparently, the company was aggressively courting LANDesk early in the process, including offering a rumored high price in exchange for exclusivity. Of course, Novell has other issues to contend with, and may well be a seller of the overall company rather than a buyer of other assets.

Vector ‘registers’ a solid exit

Contact: Brenon Daly

A half-decade after taking Register.com private, Vector Capital announced the sale of the website registration and design provider to Web.com Group for $135m. That’s a fair bit lower than the $200m the buyout shop paid for the equity of Register.com in the LBO, but a fair bit above the company’s net cost of about $90m. (Profitable and debt-free Register.com held about $55m in cash and another $55m in short-term investments when it was taken private.)

As for the return, we understand that between two dividends, a divestiture and now the sale of the business, Vector realized about 2.5 times its original $60m equity investment on Register.com. What’s interesting about the return is that Vector is making money on its holding even though Register.com actually shrank in the time it was owned by the buyout shop. Consider it a case of quality over quantity.

When it went private, Register.com was clipping along at a rate of about $25m per quarter. According to Web.com, that level has now dipped to $20m per quarter. (That may or may not be a sandbagged projection from the acquirer.) Part of the revenue decrease can be attributed to the fact that Register.com shed the corporate domain management business, which was doing just shy of $8m each quarter in business. So, on an absolute basis, the property is smaller, but on a comparable basis, the Register.com business grew on the top line.

Far more important than revenue growth is the fact that Register.com became far more profitable as a private company. (Some cuts appear pretty obvious to us: In the period before it went private, Register.com was spending about one-third of its revenue on sales and marketing.) On the conference call discussing the deal, Web.com indicated Register.com was running at a mid-to-high 20% ‘adjusted EBITDA’ margin. That’s a pretty rich level. In fact, it’s about 10 percentage points higher than Web.com’s own ‘adjusted EBITDA ‘ margins.

SonicWALL should be right at home in PE portfolio

Contact: Brenon Daly

Except for losing its ticker, we don’t expect the soon-to-be private SonicWALL to be radically different from the one that traded on the Nasdaq. At least not the SonicWALL of the past few years. The reason? The unified threat management vendor has already been running a strategy that’s found fairly often in PE portfolios.

Basically, the company has taken the cash it has generated from its rather mature core product (firewalls) and done acquisitions to expand into emerging markets. SonicWALL has inked about a deal each year for the past half-decade, buying startups that had developed technology for anti-spam, continuous data protection and, most recently, WAN traffic optimization.

The collective bill on those deals is about $78m, a relatively small amount for a company that held more than $200m in its treasury and generated roughly $10m of cash each quarter. Once it goes private, we wonder if SonicWALL won’t start eyeing some larger deals. After all, it will have deep-pocketed new owners and will no longer be penalized in its accounting for acquisitions.

SonicWALL’s shopping trips

Date announced Target Deal value Market
April 19, 2010 DBAM Systems (assets) $4m WAN traffic optimization
June 12, 2007 Aventail $25m SSL/VPN
February 8, 2006 MailFrontier $31m Anti-spam
November 21, 2005 Lasso Logic $15.5m Continuous data protection
November 21, 2005 enKoo $2.4m SSL/VPN

Source: The 451 M&A KnowledgeBase

SonicWALL heads behind closed doors

Contact: Brenon Daly

After more than a decade as a public company, SonicWALL is set to go private in a $717m leveraged buyout (LBO) led by Thoma Bravo. Terms call for the private equity (PE) firm to pay $11.50 for each of the roughly 62 million shares outstanding for the unified threat management (UTM) vendor. That marks the highest price for SonicWALL shares since early 2002. (However, that didn’t stop several law firms from investigating a possible breach of fiduciary responsibility by SonicWALL’s board, as the ambulance chasers have done in so many other recent transactions.)

As we look at the proposed LBO, the valuation strikes us as pretty fair. Our math: while the deal carries an equity value of $717m, the net cost is much lower thanks to the profitable company’s fat treasury. SonicWALL holds $213m of cash and short-term investments, lowering the enterprise value (EV) of the planned take-private to $504m. That works out to 2.5 times the company’s sales of $200m in 2009 and 2.2x projected revenue of about $230m this year.

That valuation sits about midway between SonicWALL’s two closest rivals. Four years ago, WatchGuard Technologies went private in an LBO by Francisco Partners that valued the UTM vendor at basically 1x trailing sales, on an EV basis. Meanwhile, fellow UTM provider Fortinet, which went public last November, currently trades at slightly more than 3x trailing sales. (Again, that’s calculated on an EV basis, and without any acquisition premium for Fortinet.) SonicWALL shareholders stand to get a 28% premium on their stock, assuming the LBO closes as expected in the third quarter.

Who’s calling on Callidus?

Contact: Brenon Daly

Annual shareholder meetings are typically uneventful affairs, mixing equal parts of corporate glad-handing and self-congratulatory pabulum. The few bits of business that do get done are generally little more than corporate housekeeping, such as electing board members and signing off on auditing firms. And while that’s probably how the annual meeting for Callidus Software will go next Tuesday, we have picked up on some rumblings of discontent from the shareholder base of the sales performance management (SPM) vendor.

Shares of Callidus have basically been changing hands in the $2.50-3.50 range for the past year and a half. (On Friday afternoon, the stock traded at $3.10.) After going public at $14 in November 2003, the stock spent the next four months at around that level before dropping into the single digits, where it has remained ever since. At current prices, the company sports a market cap of nearly $100m.

With shares having been basically dead money, even as the market rebounded, investors are growing impatient with Callidus’ still-incomplete switch from a license-based software vendor to an on-demand model. Undeniably, the company has made progress in that difficult transition, but it has come up short in both its emerging SaaS business and its old-line business, particularly services.

That inconsistency hasn’t won it many fans on Wall Street, which is reflected in Callidus’ valuation. On a back-of-the-envelope basis, the company is trading at basically a $70m enterprise value, or just 1.4 times its 2010 recurring revenue (roughly $50m total, with $20m maintenance fees and $30m subscription revenue). It seems we aren’t the only ones struck by the rock-bottom valuation of Callidus. Several market sources have indicated recently that at least one would-be suitor has approached Callidus about a deal.

Our understanding is that Callidus has retained a banker and is still in the early stages of an initial market canvass. Obviously, that’s a long way from a completed transaction, which is the outcome many Callidus shareholders are hoping for. It’s also worth remembering that the company itself has a spotty track record in M&A. In late 2008, Callidus was lead bidder for SPM startup Centive, and stood to substantially accelerate its transition to SaaS with the acquisition. Instead, Xactly – a startup that’s run by a number of former Callidus executives – snatched away Centive in early 2009.

What’s new at Novell?

Contact: Brenon Daly

Even though its shareholders aren’t overwhelmingly concerned with Novell’s financial numbers right now, the company will nonetheless be releasing results for its fiscal second quarter later Thursday afternoon. For what it’s worth, Wall Street expects earnings of about $0.07 per share on sales of $205m, representing year-over-year declines on both the top and bottom lines. (We should add that if Novell does manage to hit expectations, it will snap two straight quarters of earnings whiffs.)

But then Novell hasn’t traded on fundamentals for the past three months, ever since hedge fund Elliott Associates launched an unsolicited offer for the company. Novell, which is being advised by JP Morgan Securities, stiffed the bid, but did leave the door open to other ‘alternatives to enhance shareholder value.’ Since Elliott floated the offer, shares of Novell have basically changed hands at or above the $5.75-per-share bid.

As a decidedly mixed bag of businesses, Novell isn’t the cleanest match for any other company that might want to take it home. For that reason, most speculation around a possible buyer for Novell has centered on private equity firms. (The buyout shops are undoubtedly licking their chops at the prospect of picking up Novell’s $600m of maintenance and subscription revenue, not to mention the $1bn that sits in the company’s treasury.) However, we understand from a person familiar with the process that there are a handful of strategic buyers still interested in Novell.

If we were to put forward one potential suitor that could probably benefit more than any other company in picking up Novell’s broad portfolio of businesses, we might single out SAP. OK, we know it’ll never happen. (Never, ever.) But a hypothetical pairing certainly does go a long way toward filling a few notable gaps in SAP’s offering, while also making the German giant far more competitive with Oracle.

Consider this fact: some 70% of SAP apps that run on Linux run on Novell’s SUSE Linux Enterprise. Add in Novell’s additional technology around identity and access management, systems management, virtualization and other areas, and SAP’s stack suddenly looks a lot more competitive with Oracle’s stack. Again, an SAP-Novell deal will never happen, but the combination certainly does lend itself to some intriguing speculation.

Timeline: Novell in the crosshairs

Date Event Comment
March 2, 2010 Elliott Associates launches unsolicited bid of $5.75 per share for Novell The offer values Novell at a $2bn equity value but only a $1bn enterprise value
March 20, 2010 Novell rejects Elliott’s bid as ‘inadequate’ By our calculation, Elliott is valuing Novell at just 1.6 times its maintenance/subscription revenue

Source: The 451 Group

One last sale at VeriSign?

Contact: Brenon Daly

With VeriSign having somewhat unexpectedly shed its identity and authentication business to Symantec last week, we started to think about what other transactions might be coming from the former serial acquirer. What about this for a final deal? A sale of itself to a private equity shop. After all, the value of the company is hardly reflected at all on Wall Street.

To be clear, we’re not suggesting that there are any plans to take VeriSign private, at least not that we’ve heard making the rounds. Instead, we’re looking at a leveraged buyout from a strictly hypothetical view, given that the company has a number of appealing characteristics for any would-be financial buyer.

For starters, VeriSign is now a very clean story, with just the core registry business remaining. For all intents and purposes, the registry business, which handles all the .com and .net registration, is a legal monopoly. The business certainly enjoys monopoly-like operating margins of about 40%. VeriSign recently indicated that sales for 2010 (excluding the identity and authentication business) will be in the neighborhood of $675m. Loosely, that would generate about $270m in operating income at the company this year.

Fittingly for a cash machine, VeriSign has a fat treasury. At the end of the first quarter, it held nearly $1.6bn in cash. Add to that amount the $1.3bn that Symantec will be handing over for the divested businesses, and VeriSign will have about $3bn in cash banked. The vendor’s market cap is $5bn, giving it an enterprise value of just $2bn. That works out to just 3 times sales and a little more than 7x operating cash flow. (Granted, that’s without any acquisition premium.)

If we were a buyout shop or some other acquisitive-minded group, another way to look at it is that VeriSign’s remaining registry business currently trades at a discount to the security business that it just got out of. And that’s despite the fact that the registry business is far more profitable and faster-growing than the security business. (In 2009, VeriSign’s naming business increased revenue 12%, four times the rate of growth of the security business.) Maybe it’s time for one last sale at VeriSign?

Thoma Bravo doubles down on Double-Take

Contact: Brenon Daly

Just a week after we noted that the bidding for Double-Take Software had hit the final stretch, with a trio of buyout shops still in the running, one of the private equity firms announced plans Monday to pick up the file-replication software vendor. Thoma Bravo, through its Vision Solutions portfolio company, will pay $242m for Double-Take in a take-private that’s expected to close in the third quarter. Assuming it goes through, the deal will end Double-Take’s three and a half years as a public company.

Frankly, Double-Take’s run as a public company was one that we didn’t really understand. It never cracked $100m in sales, and has basically been trapped at the same revenue level it hit in 2007. In that year, the vendor recorded sales of $83m. Although sales jumped 16% to $96m in 2008, they ticked back down to $83m in 2009 and Double-Take recently guided to expect about $86m in revenue this year. And the small company was competing against the replication offerings from some of the largest storage providers on the planet: EMC with RepliStor, Symantec with Replication Exec and the replication products CA Inc obtained in its XOsoft purchase.

Perhaps it’s not surprising, then, that the $10.50-per-share bid is actually slightly below the price Double-Take fetched when it came public. In its December 2006 IPO, Double-Take priced its shares at $11 each. And although the stock did trade at twice that price in late 2007, it has been below the IPO price since September 2008. In its time as a public company, Double-Take basically matched the performance of the Nasdaq.

At an equity value of $242m, the actual cost of Double-Take is much lower. The profitable, debt-free vendor held $89m in its treasury at the end of the first quarter, meaning Thoma Bravo/Vision Solutions will only have to hand over $153m in cash. That’s just 1.8 times this year’s projected revenue, and about 4 times maintenance revenue.

Sources: a take-private for Double-Take

Contact: Brenon Daly

The final bidders for Double-Take Software have narrowed to three buyout shops, and a purchase of the file-replication software vendor could be announced within the next two weeks, we have learned. The company said a month ago that an undisclosed bidder had approached it about a possible transaction.

A number of sources have pointed to Vector Capital as the unidentified suitor, adding that the firm is one of the three bidders still in the running. Although we speculated early on that Double-Take’s two main channel partners (Dell and Hewlett-Packard) might be interested, we understand now that there aren’t any strategic bidders currently at the table.

The price couldn’t immediately be learned, but we suspect there won’t be a huge premium for the company, which was trading at $9.36 on Monday afternoon. The reason? Double-Take recently trimmed its sales outlook for 2010, essentially saying it doesn’t expect to grow this year. It recently guided to about $86m in sales for 2010, about 10% lower than it had expected earlier this year. It finished the recession-wracked 2009 with revenue of $83m, down from $96m in 2008.

Even without growth, Double-Take undoubtedly holds some appeal to a private equity (PE) firm. For starters, the company is cheap. It currently sports a market capitalization of just $200m, but nearly half that amount is made of its cash and short-term investments. (The company held $89m in its treasury at the end of the first quarter.)

With an enterprise value of only $111m, Double-Take now garners just 1.3x projected sales. Another way to look at it: even with a decent premium to the company’s current valuation, a buyer could still pick up Double-Take for about 4x maintenance revenue. Small wonder that a few PE shops are still considering a Double-Take takeout.

Sophos is a seller

Contact: Brenon Daly

Former IPO hopeful Sophos will stay private (at least for the time being), but will have a new owner, the anti-malware company said. The new majority holder is Apax Partners, having picked up a 70% stake from both TA Associates, which had been a minority shareholder since 2002, and Sophos’ two founders. The purchase put an overall price tag of $830m on Sophos.

The sale comes after much speculation that Sophos, which had filed to go public in November 2007, was once again looking for an IPO. In fall 2009, British media reports indicated Sophos was planning an offering in 2010 that would have valued the company at about $1bn. Instead, Sophos is taking what we would consider a multiple at the low end of the range, even though the company’s size and recent growth rate might imply an above-market valuation.

Sophos indicated it recorded billings of $330m and revenue of $260m for its fiscal year, which ended March 31. On a trailing basis, that works out to just 2.5 times bookings and 3.2 times sales. Assuming Sophos continued growing at a 19% rate for the current fiscal year, it would have finished this year with about $310m in sales. That means Apax is valuing Sophos at just 2.7 times projected revenue.

Other security companies that have danced on and around the public stage have recently fetched much richer valuations, at least in one key measure. Encryption vendor PGP garnered four times trailing revenue in last week’s sale to Symantec. While PGP may or may not have been planning to go public, the most recent security IPO does trade at a notable premium to the valuation Sophos just got in its sale. Unified threat management vendor Fortinet currently commands a $1.25bn market capitalization, which works out to 4.9 times trailing sales.