Tag: PE

PE group dials up Skype

Brenon Daly

Contact: Brenon Daly

Just a month after we speculated on an unconventional home for Skype Technologies, eBay found a rather unconventional home of its own for its VoIP subsidiary. Rather than go to Cisco, which is what we suggested as an (admittedly) far-flung idea, Skype has landed in a portfolio of a consortium led by tech buyout shop Silver Lake. Terms call for the group (Silver Lake, along with venture firms Index Ventures and Andreessen Horowitz, plus the Canada Pension Plan Investment Board) to hand over $2bn for two-thirds of Skype. EBay, which acquired Skype four years ago, will own the remaining one-third stake.

In most markets, a multibillion-dollar carve-out of a noncore asset led by a private equity (PE) firm would hardly be called ‘unconventional.’ (In fact, one could argue that type of transaction is precisely what PE firms should be doing.) But today’s market – even with the recovery that we’ve had – is hardly a healthy one. The equity markets have rallied, but investors – including the big investment groups that back the PE firms – are still skittish. Add to that, debt is still tough to come by. Those are the main reasons why buyout shops have been largely sitting on their hands recently, making a $2bn deal by a PE consortium a relatively unusual event.

Consider this fact: the Skype carve-out is the largest tech PE deal since May 2008. In fact, it accounts for almost half of all tech spending by buyout shops in 2009. So far this year, we’ve tallied 50 transactions that have an aggregate announced deal value of just $4.6bn. That’s one-third the amount during the same period last year ($13.1bn), and a mere fraction of the total the buyout barons spent during the same period in the boom year of 2007 ($101bn).

What’s the value of advice on the Entrust LBO?

Brenon Daly

Contact: Brenon Daly

The ‘go-shop’ period at Entrust came and went a month ago, but on Friday the security vendor nonetheless got a richer offer in its three-month-old leveraged buyout. The bidder? Thoma Bravo, the same buyout shop that has had an agreement in place since April to acquire Entrust. Originally, Thoma Bravo offered $114m, or $1.85 per Entrust share, but as the company’s shareholders were set last Friday to vote on it, Thoma Bravo bumped up its bid to $124m, or $2 for each Entrust share. The buyout shop says that is its best and final offer for Entrust.

Thoma Bravo topped itself despite having Entrust’s board unanimously back the initial $1.85-per-share bid. The raise also came despite both of the main proxy advising outfits backing the original offer, which valued Entrust at less than 1x sales, on the basis of enterprise value. If shareholders had actually listened to both Glass, Lewis & Co and Proxy Governance Inc, they would have shortchanged themselves $10m. (And shareholders have already suffered enough by holding Entrust, which has basically traded down over the past four years, with only brief interruptions.)

Undoubtedly, the proxy firms will (once again) throw their support behind the new and improved buyout bid ahead of the shareholder vote, which is slated for July 28. But any endorsement sort of strains credibility given that they already backed one deal that the would-be buyer has acknowledged was too cheap.

UPDATE: Borland gets higher bid

Brenon Daly

In a note sent out to clients before the market closed Thursday, we speculated that Borland was likely to get a bid that topped its existing agreement with Micro Focus. (See the full post.) Shortly after the market closed, Borland indicated an unidentified suitor (Company A) raised its bid to $1.25 for each share of Borland, eclipsing the $1.15 per share that the boards of both Borland and Micro Focus have agreed to. Borland shareholders had been scheduled to vote on the deal, which was originally announced May 6, on July 22. The identity of Company A wasn’t revealed. In our earlier post, we noted our suspicions that the bidder might be Embarcadero Technologies, a portfolio company of Thoma Cressey Bravo. However, one informed source has subsequently told us that is not the case.

A new bid for Borland?

Brenon Daly

Contact: Brenon Daly

Nearly a month after Micro Focus and Borland announced their planned combination, a pair of after-the-fact bidders pushed Micro Focus to reach a little deeper into its pockets for the application lifecycle management vendor. Now we’re hearing that one of the mystery suitors may well come back with a higher offer. As it stands, Borland shareholders are set to vote on Micro Focus’ bid of $1.15 in cash for each Borland share, or a total of some $92m, on July 22.

However, several sources have indicated that one unidentified party that previously floated a range of $1.10-1.20 per Borland share may well be preparing a bid that would top the existing offer from Micro Focus. The identity of that suitor has never been revealed, and is referred to as ‘Company A’ in the proxy filings. (We suspect, but have not confirmed, that Company A could be Embarcadero Technologies, which went private two years ago in a $200m buyout by Thoma Cressey Bravo. Following a split, TCB now goes by the name Thoma Bravo.) The proxy adds that Company A originally approached Borland with an unsolicited offer in June 2008, and has been more or less present during the process since then. Borland has dismissed several rounds of interest by Company A because of questions about its ability to pay for the deal.

While Company A may or may not come back with a higher offer, the other suitor that emerged after Micro Focus and Borland agreed to their deal – an unnamed private equity firm referred to as ‘Company E’ – will not be dusting off its bid, according to the proxy. Company E has never been identified, but we have a pretty strong suspicion that it could be a recently launched investment firm in the Boston area called 2SV Capital. Calls to the firm weren’t returned.

Certainly, a number of signs point to 2SV Capital as one of Borland’s mystery bidders. Two of the three partners in the firm certainly know the Borland business well, having worked together on the sale of Segue Software in early 2006 to Borland. (As we noted in a recent report on the pending sale of Borland, the Segue business is essentially the main reason why Micro Focus is interested in Borland.) 2SV Capital founder Richard Vieira, who was then working for Jefferies & Co, advised Segue, which was at the time headed up by Joe Krivickas, on the sale to Borland. (Krivickas recently joined Vieira at 2SV Capital.) If indeed 2SV Capital were interested, we suspect the buyout shop wouldn’t have needed to spend too much time on due diligence, given their understanding of the business.

Back to basics for PE

-Contact Thomas Rasmussen, Brenon Daly

Coming off a dealmaking binge fueled by cheap credit, private equity (PE) shops have been investing much more soberly since the debt market collapsed late last summer. Highly leveraged multibillion-dollar buyouts have gone the way of the collateralized derivatives. As financing has become much more expensive, PE shops have in turn become more price sensitive. Deals are much smaller and generally done with equity these days. The heyday of the PE buyout boom saw dollars spent on deals balloon from $56bn in 2005 to $98bn in 2006 before peaking at $118bn in 2007. Last year saw a drastic ‘normalization,’ with disclosed spending by PE firms falling three-quarters to just $26bn. Spending on buyouts has plummeted this year, with just $3bn worth of deals through the first five months of 2009.

Even as the aggregate value of LBOs has declined sharply, we would note that the volume remains steady. (The 90 PE deals announced so far this year is roughly in line with the totals for the same period in three of the past four years.) We might suggest that this indicates a return to basics for PE firms. Instead of bidding against each other in multibillion-dollar takeouts of smoothly running public companies, buyout firms are returning to more traditional targets: unloved, overlooked public companies as well as underperforming divisions of companies.

In terms of recent take-privates, we would point to Thoma Bravo’s pending $114m acquisition of Entrust, which valued the company at less than 1x sales. And looking at divestitures, we would highlight the recent buyout and subsequent sale of Autodesk’s struggling location-services business. Hale Capital Partners acquired the assets in February for a very small down payment and what we understand was a $10m backstop in case things went awry. New York City-based Hale Capital put the acquired property through a pretty serious restructuring. (The moves got the division running at what we understand was an EBITDA run-rate of $5m on approximately $20m in trailing sales.) Hale then sold the assets for $25m in cash and stock in mid-May to Telecommunications Systems following a competitive bidding process. Through the terms of the divestiture, Autodesk also had a small windfall in the sale of its former unit, pocketing an estimated $5m.

PE spending falls of a cliff

Year Average deal size (total known values/total deals)
2005 $218m
2006 $305m
2007 $395m
2008 $106m
2009 $26m

Source: The 451 M&A KnowledgeBase

Auction action

Brenon Daly

Contact: Brenon Daly

With one bidding war over a Nasdaq-traded company wrapped up last week, two new skirmishes broke out on Monday. Both Borland and MathStar received conditional offers of higher prices than had previously been floated for the companies. The bid-and-raise process at both these otherwise-neglected companies indicates the M&A market has recovered notably from its low point earlier this year.

In the larger of the two transactions, Borland said in a proxy filed in support of its existing agreement to sell to Micro Focus that it has received a nonbinding ‘expression of interest’ from an unnamed buyout shop. The offer – which is conditional on the firm completing due diligence on the application lifecycle management software vendor – has the firm paying $1.20 for each share of Borland. That tops Micro Focus’ offer in early May of $1 for each share of Borland.

Micro Focus’ bid, which has been blessed by the boards of both companies, came after it first showed interest in picking up Borland in July 2007, according to the proxy. Meanwhile, the proxy indicated that the unnamed financial acquirer only contacted Borland on May 21 of this year. The buyout firm added that due diligence would take about two weeks, and that its offer was not conditional on financing. Borland said in the proxy that it has opened its books to the unnamed suitor.

Meanwhile, after being in play for more than a half a year, MathStar attracted the interest of Tiberius Capital, a Chicago-based fund that offered to buy half of the company at $1.15 per share. That tops an existing offer of $1.04 for each MathStar share from another company. We would note both of these deals come after a seven-week bidding war over SumTotal Systems, which saw the final price soar 50% above the opening bid.

Emptoris shrugs off possible fine, goes shopping

Brenon Daly

Contact: Brenon Daly

A little more than four months after selling to Marlin Equity Partners, Emptoris reached into the deep pockets of its buyout shop owner to fund its first acquisition: the recent pickup of the contract and service management business from Click Commerce. The deal was part of a larger divestiture of Click Commerce by Illinois Tool Works (ITW), effectively unwinding its September 2006 acquisition. In all, three Click Commerce units went to Marlin, with only the contract and service management unit getting slotted under Emptoris.

As we noted when ITW announced the divestiture last October, Click Commerce was a puzzling purchase for ITW, a 96-year-old company that makes everything from commercial ovens to industrial packing tape to arc welders. ITW paid $292m for Click Commerce in 2006. Although terms weren’t disclosed, we understand that the unit Emptoris acquired was generating some $15m in sales. With the additional revenue, we estimate that Emptoris would be running north of $50m.

Whatever size the check that Emptoris wrote for the Click Commerce division, we would note that one insider at rival Ariba quipped that Emptoris better not spend all ‘our’ money. The Ariba source was needling its rival about the fact that a patent lawsuit between the two companies is currently in the final stages. A jury has awarded – and the court has affirmed – some $6m in damages to Ariba. Emptoris is appealing the judgment.

A bid and a raise for SumTotal

Brenon Daly

Contact: Brenon Daly

The sum total of all interested parties in SumTotal Systems may well be greater than the two that have already disclosed themselves. At least that’s the thinking among investors – or rather, speculators – in the learning management software vendor. Recall that earlier this month, Vista Equity Partners tossed the struggling company an unsolicited offer of $3.25 for each share. (Vista is being advised by Union Square Advisors.) As we noted, the bid included a ‘go-shop’ provision.

SumTotal never got back to Vista on its offer, but it did throw its arms around a slightly richer one from Accel-KKR on Friday. The white knight bid $3.80 for each SumTotal share, valuing the company at about $124m, or $20m more than Vista’s offer. However, we would note that SumTotal shares have traded slightly above Accel-KKR’s offer price since the bid was unveiled. (On Monday afternoon, SumTotal stock was changing hands at $3.85.) Like Vista’s initial offer, Accel-KKR’s included a go-shop provision. On that front, it seems like the shopping may not be done for SumTotal.

A somewhat secure M&A market

Brenon Daly

Contact: Brenon Daly

With RSA set to open later this week, we thought we’d take a look back on deal flow since the trade show closed last year. Over the past year, we’ve seen some 83 acquisitions of security companies, with total spending of about $4.2bn. While that’s down from the comparable year-earlier period (April 2007-April 2008: 90 deals worth $5.2bn), the drop-off in security M&A has not been as steep as the overall decline in tech deals. In fact, the number of security transactions slipped just 7% from the previous year, compared to an 18% drop in the number of total tech M&A. Spending on security deals also fell less than the overall market.

Moreover, there are a number of trends that have emerged since the last RSA event that suggest security M&A may well remain healthier than the overall market. For starters, the big shoppers have done big deals. By our tally, Symantec has inked the largest security transaction since the end of last year’s RSA, paying $695m in cash to bolster its on-demand offering with MessageLabs. And McAfee checked in with the second-largest acquisition. Its $497m all-cash purchase of Secure Computing was its largest deal in a decade, and its only acquisition of a public company in at least seven years (excluding the pickup of Bulletin Board-listed Citadel Security Software in 2006).

In addition to the strategic vendors, we’re also seeing financial buyers – both through funds and PE-backed companies – looking to do deals. For instance, Sophos went back to its investors to help finance its $341m acquisition of Utimaco, the largest purchase by a privately held security company of a public counterpart. Also, Vector Capital took home Aladdin Knowledge Systems and, more recently, Thoma Bravo has a pending $114m offer for Entrust. Certainly there have been a few scrap sales, but that’s to be expected in an over-funded market like security. Overall, deal flow remains comparatively healthy in the security sector.

M&A at Accellos

Brenon Daly

Contact: Brenon Daly

Another supply chain management (SCM) rollup is getting rolling. Colorado Springs, Colorado-based Accellos has already closed four acquisitions and has a letter of intent in place for its fifth. Backed by a handful of private equity (PE) firms, Accellos began shopping back in October 2006 with the double-barreled purchase of Headwater Technology Solutions and Radio Beacon. The pair of deals gave Accellos $15m of combined revenue out of the gate. The company added one company in both 2007 and 2008.

As it was closing the purchase of Prophesy Transportation Solutions last September, Accellos also pulled in a $28.5m second round of financing. (That brought its total funding to $54m, although it still has $20m of that in the bank.) Accellos, which projects that it will wrap this year with some $45m in sales, says it’s only about halfway through its shopping spree. (It’s looking for companies with revenue of $4-8m.) The company indicated at this week’s Montgomery Technology Conference that it will probably need to close a total of 9-10 deals in coming years to hit its goal of more than $100m in annual sales.

If Accellos’ strategy sounds familiar, it’s because at least two other PE-backed companies have also set about rolling up the SCM market. Battery Ventures picked up HighJump Software for $85m last May, and then tacked on BelTek Systems Design last November and Insight Distribution Software a month ago. And since Francisco Partners acquired RedPrairie in May 2005, the company has inked seven acquisitions.