Symantec gets the better end of a ‘win-win’ deal

Contact: Brenon Daly

When a marriage dissolves, it’s typically a messy process with bitter recriminations and resentments over how to divide the results of lives pooled together. Not so with Symantec’s step out of its three-and-a-half-year-old joint venture (JV) with Huawei. Selling its 49% stake in the storage and security appliance JV to its Chinese partner for $530m brings both companies a number of advantages. And while we might be tempted to label it one of those mythical win-win transactions, a closer look at the deal shows that Big Yellow gets more of the ‘win’ than Huawei, at least in our view.

From a purely financial standpoint, Symantec exits the JV having more than tripled the valuation of the entity. As CFO James Beer noted on a call discussing the sale, Symantec is realizing an annualized internal rate of return (IRR) of 31%. (We might add that performance came in the face of the worst global economic slowdown since the Great Depression, and is roughly three times the return of the Nasdaq over the same period. The IRR is undoubtedly higher than the numbers put up by many of the late-stage investors and buyout shops over that time.)

Additionally, the terms don’t limit Symantec from expanding its business in China, either in terms of distribution or even in new agreements with other hardware providers. Meanwhile, Huawei will be paying Symantec OEM royalties from its contributions to products for the next seven years. (No amount was given for those payments.) That’s not a bad deal at all for Symantec, which was advised by Citigroup Global Markets while Morgan Stanley banked Huawei.

CommVault going it alone

Contact: Brenon Daly

Even though many of the storage companies that went public over the past half-decade have subsequently been erased from the market through M&A, don’t look for CommVault to join that list. At least that’s the official word from the top of the company. CEO Robert Hammer said during his presentation at ThinkEquity’s Annual Growth Conference last week that the odds of his company getting acquired are ‘diminimous.’

CommVault is often mentioned as a takeover target, with Dell generally being viewed as the most likely buyer. Dell is CommVault’s largest OEM partner, accounting for a bit more than 20% of the company’s overall revenue. Dell has already purchased a half-dozen storage vendors, including EqualLogic and, most recently, Compellent Technologies. And now that Dell has punted its relationship with EMC, building up its own storage portfolio is a key mandate. (As one of the largest stand-alone backup software providers, CommVault competes primarily with Symantec, but also bumps up against EMC and IBM, among others.)

CEO Hammer says that rather than join the M&A parade, he’s planning to build CommVault into an independent company with sales of $1bn and an operating margin of 25%. That implies CommVault tripling revenue and more than doubling the operating margin. (One of the main reasons why CommVault runs at a relatively low 11% operating margin is because it spends more than half of its revenue on sales and marketing.) Hammer declined to set a timeframe for when the 11-year-old firm would hit those targets.

Fusion-io’s ‘flash-y’ and jumpy M&A currency

Contact: Brenon Daly

In the same breath that it announced quarterly results for the first time, Fusion-io also announced its first-ever acquisition. The flash storage specialist reached for IO Turbine, a caching software startup that had only emerged from stealth mode earlier this summer. Our storage analyst, Henry Baltazar, points out that although IO Turbine was only just getting started, its software had been bundled with Fusion-io’s PCIe flash cards. Fusion-io says the pairing boosts performance, and should open up new markets in virtualized environments.

Fusion-io will use both cash and stock to cover the $95m price of its inaugural purchase. The exact makeup of the consideration wasn’t released, but it’s basically one-third cash and two-thirds equity. That breakdown is noteworthy, given that Fusion-io – with some $220m in cash, thanks to its IPO two months ago – could have easily just used greenbacks to pay for IO Turbine.

Instead, the startup felt comfortable enough to take the majority of its payment in Fusion-io shares, which have been noticeably volatile since their June debut. Consider this: During last Thursday’s rough ride for the overall market, Fusion-io was particularly jumpy ahead of its earnings announcement. Shares opened at $28 each, dropped as much as 14% in the first hour of trading, actually popped above the opening trading price at midway through the session, and then slid almost uninterruptedly to close at the low of the day.

Granted, the trading last Thursday for individual equities was overshadowed by the historic 500-point drop in the Dow Jones Industrial Average that day. But we would note that the Dow was in the red from the opening bell, while Fusion-io actually rallied into the green at one point before sliding. Given those sorts of swings, it might not be a bad idea for the new holders of Fusion-io shares to look into a hedging plan for their holdings.

Is anyone going to play Violin?

Contact: Brenon Daly, Henry Baltazar

As Fusion-io continues to bask in the glow of its newly created billion-dollar valuation, Wall Street is already looking for the next solid-state storage specialist. Conveniently enough, Violin Memory popped up earlier this week, announcing a $40m round at a $440m valuation. (It’s pure coincidence, certainly, that Violin – headed by the same guy who used to head Fusion-io – picked the same week as Fusion-io’s debut to trumpet not only the new investment but also the valuation it fetched. Just a fluke of the calendar, of course.)

Whatever the motivation for landing two rounds of funding in just four months, Violin also talked about topping $100m in sales this year, which would certainly put it on track for an IPO of its own. Provided, that is, the company intends to go public. If it should opt to head for the other exit and sell, we suspect that the most interested bidder in Violin may well be Hewlett-Packard.

The two companies have been publishing benchmark results from a combined offering, and HP undoubtedly could use the technology boost to more effectively compete with Oracle, which has been punching HP every chance it gets. (Oracle’s none-too-subtle ‘cash for clunkers’ ad campaign around HP servers comes to mind.) Another possible suitor for Violin would be Juniper Networks, which has already invested in the startup.

Apple drops interest in Dropbox for iCloud

by Brenon Daly

Earlier this year, rumors were flying that Apple was putting together a bid – valued at more than $500m – for cloud storage startup Dropbox. That speculation obviously didn’t go anywhere, but it looked a whole lot more credible in light of Monday’s introduction of Apple’s online storage and synching offering, iCloud. The service, which will be free for up to 5GB, will be available in the fall.

On the face of it, Apple’s new service looks mostly like a convenient and efficient way to move iTunes into the cloud. Viewed in that rather limited way, iCloud appears to compete most directly with Google and Amazon, which have both launched online music storage offerings in recent weeks. But as is the case with most of what Apple does, there’s much more going on.

In addition to automatically storing and synching media files such as music, photos and movies, iCloud will keep up-to-date documents as well as presentation and other files. In other words, the uses for iCloud are pretty much exactly the same reasons why some 25 million people also use Dropbox. Is this yet another case of a Silicon Valley giant initially looking to buy but then opting instead to build?

Blue-sky thinking on a bidding war for Isilon

Contact: Brenon Daly

Based on the two previous multibillion-dollar deals in the storage industry, we should be bracing for a bidding war around Isilon Systems. Recall that Data Domain last year and 3PAR this summer each attracted after-the-fact suitors that drove up the price on both by more than a few dollars. But in the case of Isilon, we don’t actually see the process going to a public auction.

For starters, there’s the not-insignificant matter of the buy-in bid, which currently values Isilon more richly (on a price-to-sales ratio) than either Data Domain or 3PAR. (As we note in our full report on EMC’s planned purchase, Isilon is being taken off the market at its highest-ever price, roughly five times the level where the company started the year and roughly twice where it traded just three months ago.)

Setting aside Isilon’s acrophobia-inducing valuation, which company could we imagine putting in a topping bid? Admittedly, that requires a rather vivid imagination, but one name we could come up with is Dell. (My colleague, Henry Baltazar, looked at Isilon and other potential targets for Dell in a recent report.) The company has already demonstrated a willingness to spend big to build out its storage portfolio, taking home EqualLogic three years ago and making an unsuccessful run at 3PAR this summer. (If nothing else, Dell’s effort to land 3PAR signaled that the tech giant doesn’t appear content to simply continue its long-term reliance on EMC for storage business. We suspect that marriage of convenience may well be on the rocks.)

Not that we necessarily expect it to happen, but Isilon would nonetheless bring Dell a fast-growing storage vendor (roughly 60% revenue growth for 2010) and a solid roster of more than 1,500 customers, which is roughly twice the number it would have picked up with 3PAR.

Granted, there would be some overlap with the NAS technology Dell obtained with Exanet earlier this year. But Isilon would significantly enhance that, as well as fit well with Dell’s more recent storage purchase, Ocarina Networks. (Isilon and Ocarina actually had a partnership, putting Ocarina’s digital image de-duplication technology in front of Isilon. That’s particularly useful for storage requirements for media and entertainment companies, which account for one-third of revenue at Isilon.) Again, we highly doubt that Dell plans to start a bidding war for Isilon. But it’s enough to get us thinking.

Isilon and 3PAR: strikingly similar storage sales

Contact: Brenon Daly

EMC’s planned purchase of Isilon Systems comes as the second storage acquisition valued at more than $2bn in just three months. In fact, it lines up rather closely on a number of fronts with the other recent big-ticket storage deal, Hewlett-Packard’s pickup of 3PAR. For starters, the adviser. Qatalyst Partners got sole print for helping to sell 3PAR, and also had a hand in the process for Isilon. (Morgan Stanley and Qatalyst teamed up on the sell side.)

In terms of financial results, both Isilon and 3PAR are very similar. The two vendors were both generating about $200m in trailing revenue and only modest amounts of cash flow at the time of their acquisitions. (Both also had slightly more than $100m in cash on hand, thanks primarily to their recent IPOs.) That means both Isilon and 3PAR secured a valuation of more than 10 times trailing revenue in their sales to EMC and HP, respectively. If anything, Isilon is garnering an even richer valuation at 12.8x trailing 12-month sales and 8.7x projected 2011 sales.

And finally, both Isilon and 3PAR are being taken off the market at their highest-ever valuations, with acquisition offers of about $33 for each share. (That was the exact clearing bid for 3PAR, which came after two rounds of bumped bids, while Isilon shareholders are set to pocket $33.85 for each of their shares.) Given that Isilon and 3PAR were trading in the single digits just a few months before their acquisitions, shareholders in both storage vendors have reason to smile.

An acquisition breaks the back of Bakbone

Contact: Brenon Daly

In some ways, it was a misguided purchase last year by BakBone Software that led to yesterday’s distressed sale to Quest Software. The backup and recovery vendor made its largest-ever acquisition in May 2009, paying some $16m in cash and stock for ColdSpark. The rationale of the combination seemed sound at the time: broaden BakBone’s data-protection platform by adding ColdSpark’s messaging management. What could go wrong with that?

Unfortunately, plenty went wrong, as the two businesses never meshed. BackBone relies heavily on its indirect sales channel, while ColdSpark sold directly into enterprises. The average sales price for the messaging software was significantly higher than BakBone’s core storage products, which made for a highly unpredictable sales cycle at the acquired business. In the roughly one year that it owned ColdSpark, BakBone recorded only $1m in revenue from the business, according to SEC filings. It shuttered ColdSpark last May.

The integration struggles, however, came at a steep cost to BakBone, a Bulletin Board-traded company where cash has always been tight. Consider this: to generate the roughly $1m in sales at ColdSpark required spending of more than $3m in just R&D and sales/marketing efforts, to say nothing of the additional costs at the business. The spending drained BakBone’s treasury to just $5m, as of the company’s latest quarterly report.

Obscured by the smoke from the flameout around the acquisition is the fact that BakBone’s core storage management business actually puts up pretty decent numbers. In the latest fiscal year, it has run at a respectable 91% gross margin and 13% operating margin, while sales increased 9%. It boasts more than 17,000 customers. And Quest is getting all that for a relative bargain, paying just 1x sales for BakBone. As a final note on the deal, which is expected to close early next year, we would add that BakBone stands as the only public company we’re aware of that Quest has ever acquired

Symantec still struggling with storage

Contact: Brenon Daly

Symantec gives its latest quarterly update on business after the closing bell Wednesday, with Wall Street wondering if the company will ever emerge from its ‘Veritas hangover.’ The storage business, which Symantec picked up in its $13.5bn purchase of Veritas in late 2004, has long weighed on Big Yellow’s overall performance. The division posted the sharpest revenue decline at Symantec’s three business units in the previous fiscal year, and was the only one that shrank again in the first fiscal quarter. The storage business will likely shrink again in the just-completed second fiscal quarter.

None of that, of course, is new. In fact, more than two years ago, we noted how Symantec was busy knocking rumors about unwinding any of the underperforming Veritas assets. But ever since rival McAfee sold to Intel, the paltry valuation of Symantec has come into sharp relief. Consider this: Symantec generates three times the sales of McAfee ($6bn vs. $2bn) but garners less than twice McAfee’s valuation (current market cap of $12.5bn vs. McAfee’s $7.7bn equity value in its sale to Intel).

Perhaps that valuation discrepancy alone accounts for the market buzz we’ve heard recently that Symantec may be (once again) considering shedding Veritas. That move has been looked at a number of different times, in a number of different ways, over the years.

Most recently, we heard a variation on it that had the storage business going to EMC in return for the RSA division and some cash. Another rumor had the business landing at a buyout shop. (Although shrinking, the storage business is still Symantec’s largest unit, and runs at the highest margin in the company. It generates more than $1bn in operating income.) Whatever the destination, it may well be time for Symantec to acknowledge that its grand experiment of a combination of storing and securing information hasn’t gone according to plans. Wall Street has certainly given that verdict, having clipped Symantec shares in half since the Veritas deal was announced.

The thin air around Isilon

Contact: Brenon Daly

Regardless of the fact that Isilon Systems hasn’t traded on anything remotely connected to its underlying financial performance for a long time, the NAS vendor nonetheless reported third-quarter results earlier today. As these things go, it was a strong report: sales up 77% and a solid profit, reversing a year-ago loss.

The results pushed shares up about a buck to $28 each in mid-Thursday trading. That continues a run that has seen the stock nearly quadrupled so far this year, giving the storage company a mind-blowing valuation of nearly $1.8bn. The third-quarter report notwithstanding, much of that run has been spurred by acquisition speculation, with EMC reportedly in exclusive talks to acquire Isilon.

To understand how detached Isilon’s valuation is from reality, consider this: For every dollar of earnings that Isilon is projected to bring in this year, investors are valuing that at $100. That’s right, a single greenback is worth almost 100 times that amount to Isilon’s market cap. Through the first three quarters of the year, Isilon posted GAAP net income of $7m. Even assuming that the company has a blowout fourth quarter, full-year 2010 earnings are still likely to come in below $20m. Meanwhile, its equity value continues to creep toward $2bn.

Even on a more conventional measure, Isilon’s valuation ratio is still highly inflated: For every dollar in sales the company brings in, investors are valuing that at $10. At an equity value of $1.8bn, Isilon is currently trading at 10 times current-year revenue, and almost eight times next year’s revenue. Keep in mind, too, that those valuations don’t take into account any acquisition premium that would undoubtedly figure into the deal. Every dollar that a bid comes in above Isilon’s current market price adds more than $75m to the company’s price tag. That’s assuming, of course, that a bid comes.