Bidding war keeps Phoenix Technologies rising

Contact: Brenon Daly

Shareholders in Phoenix Technologies were originally supposed to have their say today on the planned take-private of their company. Instead, they’ll be sitting tight, waiting to see if the maker of core systems software can fetch yet another round of topping bids. The vote is currently scheduled in two weeks, and we wouldn’t at all be surprised if the price put to shareholders then is higher than the one on the table now.

Original bidder Marlin Equity Partners is currently offering $4.20 for each share of Phoenix Technologies, valuing the company altogether at $152m. That’s roughly 9% higher than the $139m that Marlin initially offered in mid-August before getting jumped by The Gores Group. (RBC Capital Markets is advising Phoenix Technologies in the process.) To our mind, there’s more than a little irony in a bidding war around Phoenix Technologies, a company that has been unknown and unloved for much of its two decades on the Nasdaq.

In any case, the tug-of-war over Phoenix Technologies is a far cry from the wildly lucrative bidding war around 3PAR earlier this summer. A comparable escalation would push the offer for Phoenix Technologies a bit above $7 per share, or more than $250m. That’s not likely to happen. But we could certainly imagine a few more dollars tacked on to the final price. Investors expect that as well. Shares of Phoenix Technologies have traded above the official bid all week.

PE firm Marlin buys BIOS provider Phoenix Technologies

Contact: John Abbott

Perhaps it was inevitable. Following the firing of CEO Woody Hobbs earlier this year and the subsequent divestment of three noncore businesses, BIOS maker Phoenix Technologies has itself been acquired. Los Angeles-based private equity firm Marlin Equity Partners offered $3.85 per share, giving the proposed deal an equity value of $139m. (Phoenix held $40m of cash, giving the transaction an enterprise value of $99m). The bid represents a 27% premium over Tuesday’s closing price.

Despite its recent troubles, and the seemingly cyclical nature of its business that has resulted in regular boom and bust periods, Phoenix remains by far the independent market leader in the core systems software marketplace, in particular BIOS software, as required by all Wintel PCs. BIOS remains a vital point of control for OS and desktop management. But under pressure from Intel and open source alternatives, the company has tried on numerous occasions – without any noticeable success – to diversify. That has usually resulted in Phoenix taking its eye off the ball of its core business, which entails maintaining relationships with the big PC vendors as well as the white-box original design manufacturers (ODMs) from Taiwan.

Revenue in the third quarter declined 16% year over year to $13.7m, but Phoenix scraped together a small operating profit, its first since 2008. Ninety staff were cut during the quarter, taking the firm’s total down to 313. Future growth depends on the take-up from OEMs and ODMs of its latest product, SecureCore Tiano 2.0, which began shipping in late March. Phoenix claims 50 wins so far and is working on a further 80 projects for this design cycle. The first systems using the new version should reach the market in fiscal 2011.

Phoenix sheds FailSafe

Contact: John Abbott

Phoenix Technologies announced at the start of the year that it was putting its plans to expand beyond the core BIOS software business on hold, and hired GrowthPoint Technology Partners to find a buyer for its non-strategic technology assets. A short time later, CEO Woodson Hobbs was out the door, followed soon after by CFO Richard Arnold. Ironically, Hobbs was originally hired in September 2006 to turn the company around, and his first task back then was to rebuild the BIOS business after Phoenix had lost its way through diversification. It appears that Hobbs fell into the same trap by putting too much effort into HyperSpace, a hypervisor that was being positioned as the basis for an OS for netbooks. Tom Lacey, who previously worked at Applied Materials Inc and before that Flextronics, took over as CEO in February.

Now a buyer has been announced for the first of Phoenix’s unwanted assets: FailSafe, a theft-loss protection and prevention system for laptops, and the associated Freeze computer locking system. The acquirer is security tools provider Absolute Software and the price tag is $6.9m. (This is Absolute’s second acquisition in five months: last December it spent $9.6m on the assets of Pole Position Software, primarily for the target’s LANrev asset management package). Phoenix is still trying to offload HyperSpace itself as well as the line of online PC diagnostics tools.

Since the need for a new OS to run on netbooks now appears to be fading away, HyperSpace could conceivably be utilized by vendors addressing the desktop virtualization market. However, the largest players here – VMware, Citrix and Microsoft – are working with their own hypervisors and are unlikely to want another. Interestingly, Phoenix has filed a patent-infringement lawsuit against startup DeviceVM, the developer of the SplashTop lightweight Linux OS. DeviceVM has licensing deals in place with netbook and laptop makers Asus, Hewlett-Packard, Lenovo, LG Electronics, Acer and Sony.

New CEO Lacey claims that excellent progress is being made on refocusing Phoenix back onto its BIOS business. At the end of fiscal 2009 (ending September 30), the noncore products made up less than 10% of Phoenix’s $67.7m in revenue, an overall decline of 8% over 2008. That means core BIOS sales are back down to the same level as they were in fiscal 2006, despite the acquisition of direct rival General Software Inc in July 2008. In its most recent first quarter, the company posted revenue of $15.6m (down from $17.4m in Q1 2009) and a profit of $1.1m (including a one-off $7.1m income tax refund). Phoenix has cash on hand of $27.9m.