Mirror moves at CA and Compuware

Contact: Brenon Daly, Dennis Callaghan

Both Compuware and CA Technologies recently announced deals for application development and the related field of performance monitoring in which the transactions themselves shared more than a few similarities. The two acquisitions saw the old-line companies, with their corporate roots in the mainframe era, paying nearly double-digit multiples for startups that have been doubling sales each year. Further, each buyer was adding the acquired technology to an existing management platform that has largely been shaped by earlier M&A.

In the first transaction, CA Technologies announced that it will hand over $330m in cash for ITKO, which adds testing capabilities to CA’s management portfolio as well as makes the company more of a player in ‘devops’ as cloud adoption blurs the roles between development and operations in IT departments. The following week, Compuware paid $256m in cash for dynaTrace Software to bolster its business transaction management offering, particularly in the area of pre-deployment performance monitoring, which goes hand-in-hand with testing. The two deals mean that the companies will be competing hard against each other in distributed systems performance testing and monitoring, especially around Java applications.

For the targets in the purchases, though ITKO and dynaTrace were focused on slightly different markets, the two startups had a number of traits in common. Both were founded far from Silicon Valley and went on to be parsimonious fundraisers, each drawing in only about $20m. (In other words, an exit price that was 10 times greater than the money that went into the company.) Both startups had more than 100 employees and were tracking to top $50m in sales next year. And finally, both startups went with boutiques to advise them on the sales, with ITKO tapping Qatalyst Partners and dynaTrace working with Pacific Crest Securities.

Qatalyst strikes again, but bigger

Contact: Brenon Daly

When Jason DiLullo joined Qatalyst Partners last April, the boutique firm announced that he would play a major role in expanding the firm into semiconductor deals. Indeed he did. Qatalyst is getting sole credit for advising Atheros Communications on its sale to Qualcomm, the largest chip acquisition in four years. (On the other side, Goldman Sachs and Barclays Capital advised Qualcomm.) With an equity value of $3.6bn, it is Qatalyst’s largest deal – by about $1bn, no less – since it opened its doors in March 2008.

The chip deal brings the total value of the 10 transactions that Qatalyst has worked on to more than $17bn. Of course, the firm is primarily known for its role in helping to consolidate the storage sector, working on the sales of Isilon Systems and 3PAR last year, as well as Data Domain in mid-2009. (All three of those companies were erased from the market at their highest-ever valuation.) Collectively, the equity value of those three storage deals is about $7bn – ‘only’ twice the amount of Qatalyst’s sole chip deal.

Brocade on the block? Of course it is

Contact: Brenon Daly, Simon Robinson

Having recently marked the anniversary of its largest-ever acquisition, Brocade Communications may now find itself on the other side of a transaction. At least that’s the speculation from The Wall Street Journal, which reported Monday that the storage and networking giant has retained a banker (reportedly Frank Quattrone’s Qatalyst Partners) to shop it. While the report was enough to goose the stock to its highest level since June 2008 (shares were up 15% to $8.82 in Monday-afternoon trading), it’s worth pointing out that being shopped is a long way from getting sold.

It’s also worth mentioning that speculation about Brocade being in play is nothing new. As my colleague Simon Robinson noted in late March, the consolidating networking landscape makes Brocade a likely target. (After all, Brocade itself is an example of the consolidation. A traditional SAN networking provider, Brocade spent $2.6bn to expand into IP networking with its landmark purchase of Foundry Networks.) In the report, Robinson taps IBM as a likely buyer for Brocade as a way to gain an immediate presence in the networking space as well as strengthen its lead in the server sector. (Big Blue is one of the largest of Brocade’s OEM partners, which now number 23 companies.)

Hewlett-Packard is a less likely acquirer, in our view, because of the substantial overlap between HP’s newly reinvigorated ProCurve line and Foundry. That said, Brocade is a key supplier of datacenter infrastructure technology, so it is likely to be of interest to sever vendors like HP. Brocade’s appeal might be even sharper now that HP and Cisco Systems, which were once chummy, have found themselves on opposing sides in their efforts to equip the modern datacenters.

One additional buyer that certainly makes sense for Brocade, even more so because of a recently strengthened OEM arrangement, is Dell. The hardware provider, which has already bought its way into storage and other IT infrastructure markets, recently bolstered its OEM arrangement with Brocade to include IP networking and fiber-channel-over-Ethernet gear. (For the record, the WSJ article doesn’t mention Dell as a possible acquirer but, inexplicably, includes Oracle as a suitor. We suspect that Larry Ellison has plenty of other areas of software to consolidate before a hardware-heavy purchase that pits Oracle against Cisco.)

In terms of valuation, we would note that with the M&A-inspired speculative buying, Brocade shares have more than tripled so far this year. (Trading in Brocade stock through mid-Monday was already more than five times heavier than average.) The run has given Brocade an enterprise value (EV) of $4bn, including the jump on Monday. That values it at almost exactly the same level as Cisco on an EV-to-trailing-EBITDA valuation and a slight discount to the networking giant on an EV-to-trailing-sales multiple.