Contact: Brenon Daly
After years of writing multibillion-dollar checks in some of the largest tech transactions, private equity (PE) shops dramatically scaled back their purchases in 2011. The single biggest deal last year (The Blackstone Group’s $3bn take-private of healthcare technology vendor Emdeon) only ranked 15th among the largest transactions in 2011.
It was the first time PE firms haven’t have a hand in at least one of the year’s 10 largest deals since 2008. Even in the recession-wracked year of 2009, one buyout slotted into the top 10. And in 2010, when the economy appeared to be solidly recovering and the credit markets were more welcoming, PE firms accounted for fully three of the 10 largest transactions of that year. But last year, the buyout barons were overwhelmed by their corporate rivals, who are flush with cash.
Contact: Brenon Daly
It must be election season. That’s what struck us when we saw earlier this week that Renaissance Learning went ahead and accepted a buyout offer that valued the online education vendor at about 10% less than an unsolicited bid. To our ear, some of the material in the proxies filed in connection with the $455m leveraged buyout could very well have come from a campaigning politician. The deal closed earlier this week.
Consider the language that the company used in laying out why shareholders should follow the lead of the company’s cofounders, who controlled some 69% of the equity, and back the initial offer from buyout firm Permira: The deal would be ‘more favorable’ to the employees and the broader community than the unsolicited bid from rival company PLATO Learning. (In addition, Renaissance said PLATO’s offer would take longer and be less likely to close, in their view.)
The concern, presumably, is that there would be far more overlapping employees if the two companies were merged, resulting in more job cuts than if Renaissance were taken private and largely left to run as it had been running. Who knows, maybe if PLATO took the company over, the combined company would start with cuts in the executive ranks. If that were the case, the cofounders of Renaissance would go from majority owners to unemployed.
Don’t get us wrong. We’re all for not contributing to the already intractably high unemployment rate in the US. But as a public company, Renaissance has a fiduciary responsibility to all its shareholders, not just the ones in its hometown. It’s worth noting that Renaissance is incorporated in its home state of Wisconsin, rather than the typical location for incorporation, Delaware. (Roughly half of US companies, including PLATO, are incorporated in Delaware.) So that may go some distance toward explaining why the company made ‘jobs and community’ a part of its pitch.
Contact: Brenon Daly
If Lawson Software had held its scheduled call later this afternoon to discuss its third-quarter earnings report, we suspect that attendance would have been a bit higher than usual. Instead, the old-line ERP vendor scrapped it, citing the two-week-old unsolicited offer from industry consolidator Infor Global Solutions. (Those sorts of things tend to happen to companies that count Carl Icahn as their largest shareholder.) Lawson, advised by Barclays Capital, has said only that it is reviewing the proposal.
While Lawson’s silence is entirely understandable from a company that’s been put in play, it did nothing to dampen investor speculation that another suitor would show up. The stock, which has traded above the $11.25-per-share bid since it was launched, inched a little higher to $12.14 in Thursday afternoon activity. Lawson shares haven’t seen these levels since March 2002.
Perhaps inevitably, Oracle’s name has surfaced as a potential buyer. While Lawson isn’t particularly cheap, it’s also not particularly expensive. Its current market cap of $2bn works out to about 2.6 times projected sales of $770m for the current fiscal year and roughly 15x EBITDA. Another way to look at it: the market values Lawson at about 5x its maintenance revenue. (For comparison, Epicor Software trades at 1.7x sales and roughly 3x maintenance revenue.)
For buyout shops, Lawson’s valuation is already at the upper end of the range that could still deliver a decent financial return, we would think. Of course, Infor is owned by a private equity firm, Golden Gate Capital. But in terms of bidding, Infor is more of a strategic buyer than a financial one when it comes to ‘synergies.’ After all, privately held Infor already has the corporate infrastructure in place to run a $2bn business, roughly three times the size of Lawson.
Contact: Brenon Daly
With this latest scandal, it’s clear that executives at Hewlett-Packard have lost their way from the ‘HP Way.’ The fairness and mild-mannered approach that once characterized the tech giant has been replaced by a leadership that in recent years has either engaged in or condoned spying, padded expense accounts and played out their own version of Dangerous Liaisons with a former actress in soft-core movies. (Although we’ve been assured that those get-togethers were not sexual, bien sur). Where leaders of HP were once patrician, they now look paranoid; once venerable, they now look venal.
Not that such ineptness and indiscretion will necessarily hurt erstwhile executives from HP. First, it was Carly Fiorina. Despite a largely vacuous tenure that included a misguided purchase of Compaq (not to mention an even more misguided attempt to buy PricewaterhouseCoopers a decade ago), Fiorina is now as likely as not to find her way to the US Senate, representing the most populous and influential state in the union. We suspect that Fiorina’s successor – the recently dispatched Mark Hurd – will likewise land on his feet.
Our guess as to where he’ll work? Private equity (PE). If we think about it, Hurd has already shown many of the skills required to work in a buyout shop. He’s overseen acquisitions of fallen businesses of questionable relevance (3Com) and even questionable viability (Palm Inc). He’s wielded a sharp knife in the name of operational efficiency, trimming tens of thousands of workers from the HP payroll as well as services giant EDS, the $13.9bn purchase two years ago that stands as Hurd’s legacy deal.
And finally, as some critics might point out, Hurd has also demonstrated a PE-style ability to line his own pockets all the while. Despite acknowledging that he failed to live up to HP’s code of conduct – a code, incidentally, that he trumpeted – Hurd’s severance package will give him some $12m in cash plus equity compensation that could be worth twice that amount. To be fair, some of the golden parachute comes from the fact that HP shares have doubled during Hurd’s tenure. And in the end, it’s his Wall Street performance, rather than his corner office peccadilloes, that could very well find him in demand at a buyout shop.
Contact: Jarrett Streebin
In an effort to increase its appeal in emerging markets, Nokia has bought Novarra, the first of two deals in as many weeks. With the acquisition, Nokia obtains Novarra’s faster and more-efficient browser, which is important in emerging markets where bandwidth limitations exist. Nokia is also playing catch-up with players like Apple and Research In Motion that already have their own browsers.
Nokia ships more than 400 million phones annually, many to customers in emerging markets such as Africa, Asia and South America. Having a fast, low-bandwidth browser like Novarra will enable Nokia to better attract carriers in these regions and with the smartphone craze just starting to take off, the company gains an edge on competitors whose browsers require more bandwidth.
Although the deal value wasn’t released, we understand that Nokia paid roughly four times trailing sales for Novarra. The 10-year-old startup had received $88 million in funding from JK&B Capital, Qualcomm, Fort Washington Capital Partners, Kettle Partners and Colorado Investment Securities, with $50m of this coming in a round in 2007.
This move will also affect Novarra’s rivals such as Opera Software and Mozilla. The impact on Mozilla will be limited because its browser targets 3G smartphones like Nokia’s N900 to provide a rich, unconstrained mobile browsing experience. Opera is currently the market leader in mobile browsing, with more than 50 million active users, many of whom are using Nokia phones. Now, Nokia will have its own browser to compete. Although this will cut Opera’s market share, Vodafone has already announced that it will be preloading Opera on many of its phones in emerging markets. It could be that Vodafone needs a browser of its own, too.
-Email Thomas Rasmussen
We’ve been closely watching VeriSign’s grueling divestiture process from the beginning. One year and $750m in divestitures later, VeriSign is largely done with what it set out to do. The company finally managed to shed its messaging division to Syniverse Technologies for $175m recently. Although we have to give the Mountain View, California-based Internet infrastructure services provider credit for successfully divesting nine large units of its business in about a year during the worst economic period in decades, we nonetheless can’t help but note that the vendor came out deeply underwater on its holdings. From 2004 to 2006 it spent approximately $1.3bn to acquire just shy of 20 differing businesses, which it has sold for basically half that amount. (Note that the cost doesn’t include the millions of additional dollars spent developing and marketing the acquired properties, nor the time spent on integrating and running them, which undoubtedly hurt VeriSign’s core business.)
Aside from the lawyers and bankers, the ones who really benefitted from VeriSign’s corporate diet were the acquirers able to pick up the assets for dimes on the dollar. And in most cases, the buyers of the castoff businesses were other companies since the traditional acquirers of divestitures (private equity firms) were largely frozen by the recent credit crisis. The lack of competition from PE shops, combined with the depressed valuations across virtually all markets, means the buyers of VeriSign’s divested businesses scored some good bargains. Chief among them are TNS and Syniverse, which picked up the largest of the divested assets, VeriSign’s communications and messaging assets, respectively. Wall Street has backed the purchases by both companies. Shares of TNS have quadrupled since the company announced the deal in March, helped by a stronger-than-expected earnings projections this year. More specifically, Syniverse spiked 20% on the announcement of its buy, which we understand will be immediately accretive, adding roughly $35m in trailing 12-month EBITDA.
VeriSign’s divestitures, 2008 to present
|August 25, 2009
|May 26, 2009
|Managed security services
|May 12, 2009
|Paul Farrell Investor Group
|Real-Time Publisher Services business
|March 2, 2009
|Transaction Network Services
|Communications Services Group
|February 5, 2009
|Sinon Invest Holding
|3united Mobile Solutions
|May 2, 2008
|April 30, 2008
|Digital Brand Management Services business
|October 8, 2008
|Jamba (remaining 49% minority stake)
|April 9, 2008
|Self-care and analytics business
Source: The 451 M&A KnowledgeBase *451 Group estimate
-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
|Average deal size (total known values/total deals)
Source: The 451 M&A KnowledgeBase