Tag: PE

PE: which door is marked ‘exit’?

Brenon Daly

by Brenon Daly, Jason Schafer

After chalking up some 17 purchases under the ownership of a private equity (PE) consortium, ViaWest has been bought by another PE firm. Oak Hill Capital Partners will pick up the 11-year-old managed hosting provider, which currently operates 16 datacenters and counts 1,000 customers. Although financial details of the transaction were not disclosed, we estimate the purchase price at around $420m. That works out to about 4.2 times trailing revenue and about 10 times cash flow for ViaWest, according to our understanding. (My colleagues at Tier1 Research estimate that roughly 70% of ViaWest’s revenue comes from its colocation business, with the remaining 30% coming from managed services.)

The deal, which should be completed this quarter, caught our eye because it is yet another recent sponsor-to-sponsor transaction that we estimate is valued in the hundreds of millions of dollars. Almost exactly two months ago, Francisco Partners flipped RedPrairie to New Mountain Capital for what we understand was roughly the same price as ViaWest. The sale of the supply chain management vendor came even though it had filed a few months before that to go public.

While there’s certainly nothing wrong with buyout shops swapping assets, it’s hardly the sign of a healthy exit environment for PE firms. Of course, there is one gigantic counterpoint to that: NXP Semiconductors, owned by Bain Capital and KKR, filed last week to sell $1.15bn worth of shares on the NYSE. The buyout tandem picked up the chip maker in 2006, when it was spun off of Royal Philips Electronics. We’re certain that a lot of fellow financial buyers, which also took home chip companies during the LBO boom in 2006-07, will be following NXP’s offering very closely.

A Double-Take takeout?

Brenon Daly

Contact: Brenon Daly

Never mind the business, somebody has their eye on Double-Take Software. The file-replication software vendor said Monday that it came up short in its first-quarter performance, continuing the struggles that it saw throughout 2009. Last year, maintenance revenue flat-lined, while license sales dropped by one-quarter. And although the first quarter is starting off a bit underwhelming, Double-Take is still projecting that it will grow this year. However, even if the company hits the high end of its estimate of $95m, sales for 2010 will still fall just short of 2008’s level of $96m.

Apparently, that lackluster performance hasn’t dimmed the company’s appeal. As Double-Take was announcing its Q1 miss, it also said – in an ‘Oh, by the way…’ manner – that it had received an ‘unsolicited, non-binding’ expression of interest from an unnamed suitor. No terms were revealed so it’s hard to know, specifically, what’s on offer to Double-Take shareholders. The company says only that the bid is ‘above recent trading prices.’ Does ‘recent’ mean a bit under $9, where shares have been since early February? Or does ‘recent’ also include the period in January when shares changed hands above $10, before the company warned (for the first time) that the quarter was coming in a bit light? On the report, Double-Take stock jumped 15% to $10.05 in Monday afternoon trading.

As to who might have floated the bid, it strikes us that this looks like a private equity (PE) play. If a strategic buyer wanted Double-Take, we don’t see it approaching the company in such a fast-and-loose way. Besides, there are basically only two companies that would make obvious bidders: Dell and Hewlett-Packard. The two tech giants are Double-Take’s main channel partners, with Dell accounting for a full 17% of the company’s revenue on its own. Also, both vendors could presumably benefit from Double-Take’s large customer base of SMBs, which numbers more than 22,000. Of course, an auction could draw out any interested strategic player, so the potential bidders aren’t necessarily limited to HP and Dell.

But as we say, we think this offer came from a buyout shop. And we can certainly understand Double-Take’s attractiveness to a financial buyer. In short, it’s cheap. Even with the stock’s pop on Monday, the company still only garners a market cap of about $220m. And the net cost is even cheaper, because the debt-free, profitable vendor carries almost $100m in cash on its balance sheet. At an enterprise value of just $120m, Double-Take is valued at less than three times its maintenance stream. That’s a valuation that any number of PE firms probably figure they could make money on.

An exclusive ‘club’

Brenon Daly

Contact: Brenon Daly

The price of admission for a ‘club deal’ just got a bit more expensive. The trio of private equity (PE) firms bidding for Irish e-learning firm SkillSoft recently bumped their offer to $1.2bn, up from the original $1.1bn bid in mid-February. The buyout firms teaming up to take SkillSoft private are Berkshire Partners, Bain Capital and Advent International. According to terms, the trio will be using equity to cover slightly more than half of the purchase price ($680m, or 57% of the $1.2bn transaction).

The planned leveraged buyout (LBO) of SkillSoft is one of only three take-privates by a PE club since January 1, 2008 valued at more than $1bn. (That doesn’t include syndicate purchases of divestitures or other parts of companies, such as the carve-out of Skype from eBay by a quartet of firms.) When credit was flowing freely in 2006-07, multibillion-dollar LBOs were plentiful, which was a primary reason that overall spending on tech M&A in each of those years topped $400bn. In both 2006 and 2007, PE shops accounted for more than 20% of all money spent on tech deals.

The topping bid for SkillSoft comes at a time when overall PE spending is dropping to some of the lowest levels since it began to recover last year. After averaging about $9bn in both of the quarters since the US recession officially ended, the value of deals by PE firms fell to just $6bn in the recently completed first quarter. Incidentally, the decline of PE deal value matched almost exactly the drop-off in overall first-quarter tech M&A spending, which came in at the low end of the range that we’ve tallied in recent quarters. Click here to see our full report on first-quarter M&A.

PE activity

Period Deal volume Deal value
Q1 2010 63 $6bn
Q4 2009 92 $9.9bn
Q3 2009 83 $8bn
Q2 2009 76 $2.8bn
Q1 2009 46 $250m

Source: The 451 M&A KnowledgeBase

A nope from Novell

Brenon Daly

Contact: Brenon Daly

The only surprise about Novell turning down the unsolicited $2bn offer from Elliott Associates was the timing. In an unorthodox move, the software vendor said ‘thanks, but no thanks’ to the hedge fund on Saturday morning, when most thoughts were turning to a full day of March Madness. (And what a maddening day it turned out to be, at least for people who filled out their brackets with top seeds: On Saturday, teams seeded No. 1, No. 2 and No. 3 all got sent packing.)

In dismissing the bid, Novell’s board of directors said the offer from Elliott of $5.75 for each share ‘undervalues’ the company and its growth prospects. As an aside, we’re not exactly sure what growth Novell is referring to. The vendor has come up short of Wall Street revenue estimates for both quarters of its current fiscal year so far, and sales this fiscal year, which ends in October, will almost certainly come in below the $862m it recorded last fiscal year. Revenue in the following fiscal year is also likely to come in below last fiscal year, at least according to Wall Street projections.

Even without much top-line excitement, Novell does nonetheless have some valuable assets: A bankable $600m maintenance revenue stream, a decent Linux business and probably the fourth-largest portfolio of identity and access management technology. Of course, its most attractive property is its treasury, which is stuffed with a cool $1bn in cash and short-term investments.

And finally, we would note that Novell does have an experienced adviser in JP Morgan Securities as it explores options to enhance shareholder value. In just the past 10 months, JP Morgan has worked with two other long-in-the-tooth software companies that have been targeted in publicly contested M&A processes. Both Borland Software and MSC Software ended up getting sold, with Borland going for a whopping 50% higher than the initial bid.

Plenty of capital for Human Capital Management buyers

Brenon Daly

Contact: Brenon Daly

For the fragmented market segment called human capital management (HCM), we’d put the emphasis on ‘capital.’ Both of the two largest public HCM vendors (Taleo and SuccessFactors) have done secondaries in recent months, despite already having pretty fat treasuries. Taleo, which held some $77m in cash at the end of the most recent quarter, sold more than $130m worth of stock in late November. That offering came a month after rival SuccessFactors, which held $122m in cash, raised some $215m in its secondary.

Despite all the cash, neither player has been particularly concerned with using it to go shopping. SuccessFactors has never bought a company while Taleo has inked just one deal in each of the past two years. In May 2008, Taleo consolidated rival Vurv Technology for $128.8m in cash and stock. Last September, it spent $16m in cash for startup Worldwide Compensation, an acquisition that followed an initial early investment in the compensation management vendor. We have noted for some time that both SuccessFactors and Taleo are likely to be busy, and in fact, we heard gossip that SuccessFactors came very close to closing a deal at the end of 2009, but it fell through.

We were thinking about all this potential M&A last week, when one of the HCM rollups got rolling. Authoria, which is owned by buyout firm Bedford Funding, announced its first deal since it got snapped up in September 2008. We estimate that the $100m purchase of Peopleclick will more than double Authoria’s revenue. Not that the deal tapped out Authoria’s bank account, either. It still has some $700m to spend. Adding up the money the would-be buyers (both financial and strategic) have to shop in this market, we expect HCM deals to follow in 2010.

The wisdom of the crowds

Brenon Daly

Contact: Brenon Daly

As pretty much the only buyers at the table right now, corporate development executives’ views go a long way toward shaping the overall outlook for tech M&A. So it seems a fitting time to survey these shoppers in order to get their expectations for deal flow in 2010. The views of the corporate buyers are crucial to understanding deal flow because, collectively, strategic acquirers account for some 85% of the total M&A spending so far this year. (Note: If you are a corporate development officer and would like to take part in our survey, just email me and I’ll send you the link for the survey, which should only take about five minutes to complete.)

Over the past few years, the survey responses have correlated very closely with how deal flow has actually developed. For instance, when we asked corporate development executives last year what they expected to pay for startups in the coming year, nine out of 10 said private company valuations would come down in 2009. (That has certainly been the case this year.) And in our summer survey, we noted a significant increase in M&A appetite among the strategic buyers. That has certainly been the case, too. Spending on deals in the second half of 2009 is running 50% higher than the amount spent in the first two quarters of the year. Again, if any corporate development officers would like to take part in this survey, contact me and I’ll get you the form.

A management ‘buy-under’ at Silicon Storage Technology?

Brenon Daly

Contact: Brenon Daly

In the third-quarter earnings report for Silicon Storage Technology at the end of October, chief executive Bing Yeh went out of his way to tout the vastly improving outlook for the flash memory vendor. Yeh noted that end-market demand had recovered and pricing had firmed up in what had been a pretty tough market. Third-quarter sales picked up sequentially and the company actually posted black numbers after three straight quarters of losses. The rebound was expected to continue in the fourth quarter, with a profit forecast for the period, as well.

And yet, the price that Yeh and his buyout partners at Prophet Equity bid for SST last week is actually lower than the vendor’s share price on the day Yeh made his comments about the rosy outlook for the company he heads. In fact, over the past two months, shares of SST have only traded below the proposed sale price of $2.10 in 11 of the 46 trading days. Looked at another way, the proposed management buyout (MBO) of SST represents a ‘take-under’ (rather than a takeover) when compared to the closing price in three out of four sessions since early September.

By their very nature, MBOs are fraught with conflict. In cases like SST, where executives plan to roll over their stakes in the company, the executives are effectively both buyers and sellers of the firm. (According to SST’s proxy, Yeh holds roughly 11% of all shares, making him the single-largest owner of the vendor.) The conflict emerges when we look at the basic economic self-interest on both sides of the transaction: The owners of SST (including Yeh) want to get as high a price as possible in the sale of their business, while the buyers (including Yeh) want to pay as low a price as possible to purchase the business.

Beyond the mismatch of motivation in MBOs, there’s also the thorny issue that executives almost certainly have insights on their business that aren’t available to other owners. We would guess that Yeh, who helped found SST 20 years ago and also serves as the chairman of the company’s board, probably knows more about the firm’s business and its prospects than anyone else on the planet.

At least one other insider at SST, however, didn’t share the support of the below-market MBO. Board member Bryant Riley, the founder of the Southern California investment firm B. Riley & Co., voted against the proposed buyout and then resigned from the board. (It’s worth noting that Riley got his seat in May 2008 only after agreeing to stop pestering the company about ‘strategic alternatives.’) Most SST investors – at least those who don’t stand to have a stake in the privately held company – have also voted against the deal. Shares have traded above the offer price since the bid was revealed November 12.

At long last, Kana gets gone

Brenon Daly

Contact: Brenon Daly

Exactly three years ago, we bluntly wrote that there was no reason for Kana Software to be a public company, at least in its current form. Kana’s performance in the intervening 1,000 days since we published that report did nothing to change our view. If anything, as the red ink continued to gush at Kana, we became even more convinced of the need for a sale of the customer support software vendor. The sale finally happened Tuesday, with Accel-KKR agreeing to pay $49m in cash for most of Kana.

We were hardly alone in our assessment that Kana – a money-burning, Bulletin Board-listed company that also had negative working capital – should be cleared off the exchange. As we noted earlier this summer, Kana’s largest shareholder also wanted something to change at the company. KVO Capital Management, which had owned some 8.5% of the company, was pushing earlier this summer to get a director on the Kana board. KVO, which declined to comment, has agreed to back the sale to the buyout group, according to the release.

A PE rebound?

Brenon Daly

Contact: Brenon Daly

After the turmoil in the credit market essentially knocked PE shops out of tech M&A for much of the past two years, we’re hearing various indications that buyouts may be coming back. We recently noted the rumor in the market that in the coming weeks PE firm Francisco Partners will ink in the paperwork for a public offering for one of its portfolio companies, RedPrairie. And bankers indicate financial buyers are once again looking to add to their portfolios, rather than just support their existing investments.

Meanwhile, on the other end of the PE lifecycle, there’s also some bullishness for buyout funds from limited partners, at least according to one source. Marlin Equity Partners is said to have recently raised a $450m third fund – and even had commitments for up to $600m. Los Angeles-based Marlin, which last raised a $300m fund two years ago, didn’t return a call.

Of course, we have to look at any rebound in the overall LBO market in context. Certainly, we have seen some notable purchases this year by Symphony Technology Group, Vista Equity Partners and Thoma Bravo – as well as, of course, the pending carve-out of Skype, which is being led by Silver Lake Partners. But even with all of that, the value of tech LBOs announced so far in 2009 is only $12bn – just half the $23bn announced in the same period last year. And forget about the time when the buyout barons accounted for more that one-quarter of all tech M&A spending; so far this year, the share of PE firms of overall deal flow is just 11%.

Does Wall Street run through the RedPrairie?

Brenon Daly

Contact: Brenon Daly

Along with the rising equity markets, there’s a new flow of companies that are planning to file their IPO paperwork in the next few weeks. For instance, we know of two venture-backed mobile vendors that have picked underwriters and plan to put in their prospectuses shortly. And we’re willing to bet that the expected strong offering from Fortinet, which initially filed in early August and is likely to debut before Thanksgiving, will catch the eye of quite a few VCs who have sizeable security providers in their portfolios.

Altogether, it looks like a decent IPO pipeline for VCs, as long as the equity markets hold. But what about their brethren at PE firms? We’ve seen the buyout barons file to flip a few non-tech holdings back onto the market, and the big offering from Avago Technologies (the carve-out of Hewlett-Packard’s semiconductor business by Kohlberg Kravis Roberts and Silver Lake Partners) has been above water since it hit the Nasdaq in early August. But there are still a lot of PE firms with pretty full portfolios that would like to post a realized gain – as opposed to ‘paper gains’ – before going out and raising a new fund.

So which PE-backed company is likely to hit the public market? Several sources have indicated that RedPrairie, an inventory management software vendor owned by Francisco Partners, has selected bankers and plans to ink an S-1 in the coming weeks. Francisco acquired RedPrairie in mid-2005, 30 years after the company was founded. Since the buyout, RedPrairie has rolled up six other companies. In 2008, the firm generated almost $300m in revenue. That puts RedPrairie’s revenue in the same neighborhood as rivals i2 and Manhattan Associates, but below the sales of JDA Software and Epicor Software.