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.
Contact: Nick Patience
Last week was more or less bookended with two acquisitions in the e-discovery market, with Autonomy Corp picking up Iron Mountain’s digital assets on Monday and Symantec buying Clearwell Systems on Thursday. Autonomy and Symantec share a market but little else between them. Both are experienced acquirers – having made, collectively, 50 deals over the past decade – but each company chooses its targets and executes acquisitions in very different ways.
Autonomy often buys rivals simply to remove them from the market. Or it inks deals to obtain customer bases or move into adjacent sectors, and it often swoops in on companies at the last minute (as it did with Zantaz in 2007). The purchase of Iron Mountain’s divested business has all four of those characteristics. Iron Mountain was a direct rival in the e-discovery and archiving segments, while it also provided a backup and recovery business, which is a new area for Autonomy. The buyer also netted 6,000 customers, although there is some overlap. Autonomy took out Verity back in 2005 to remove a competitor and picked up Zantaz to get into the archiving space. The vendor is known for being aggressive in integrating companies, which often leads to a lot of people quickly moving on after being acquired, and we expect both people and products to be removed rapidly here.
Symantec’s M&A strategy is still somewhat shaped by its misguided attempt to add storage to its core security offering with the acquisition of Veritas in 2004. (That deal remains Big Yellow’s largest-ever purchase, accounting for more than half of the company’s entire M&A spending.) Of course, that transaction happened more than a half-decade ago and a different management team was heading the company.
Still, that experience – along with the constant reminders about the misstep from Symantec’s large shareholders – appears to have made the company more considered in its approach. For example, it had been working with Clearwell in the field as well as at the product development level for more than two years before the deal. However, we don’t think Big Yellow could have waited much longer to add some key e-discovery capabilities to boost its market-leading (but aging) Enterprise Vault franchise. We suspect that is why Symantec paid such a high premium for Clearwell, valuing the e-discovery provider at 7 times sales – more than twice the multiple Autonomy paid in its e-discovery purchase.
Clearwell had been on a growth tear since its formation at the end of 2004 and the firm helped define the e-discovery space, starting with early case assessment and then systematically moving into other segments of the e-discovery process. We get the feeling that management may have wished to have waited another year or so before being bought. We think they would have relished the chance to turn Clearwell into something substantial and possibly take it public; the fact that no bankers were used on either side indicates that Clearwell was not actively shopping itself around. But some offers are just too good to turn down.
Contact: Brenon Daly
While investors will be tuning in for Oracle’s Q3 report after the market’s close today, we can’t help noting that there hasn’t been much news from the consolidator recently. It has yet to announce a deal in 2011, an uncharacteristic dry spell for a company that averaged an acquisition every six weeks in each of the past two years. In Q1 2010, Oracle announced three transactions and even in the recession-wracked Q1 2009, the software giant announced a pair of deals – but nothing so far this year.
In fact, Oracle has been out of the market since it spent $1bn on Art Technology Group in early November, nearly five months ago. And it’s not just Oracle that’s currently on the M&A sidelines. Fellow big-name buyers such as Microsoft, Symantec, EMC and Nokia have all yet to open their accounts in 2011. Even serial shopper IBM was also on that list until earlier this week, when it announced its purchase of Tririga
Contact: Brenon Daly
Looking back on dealmaking in 2010, it strikes us that it wasn’t the year that it could have been. With the recession (officially) behind us and many tech companies’ stock prices and cash hoards hitting record levels, we might have thought M&A last year would rebound to pre-Credit Crisis levels. That wasn’t the case.
In 2010, we tallied some 3,200 transactions – a slight 7% increase over the number of deals in the recession-wracked years of 2008 and 2009. In the far more important measure of tech M&A spending, the $178bn in 2010 represented a substantial 21% jump from 2009 levels. But it’s just half the annual amount we saw from 2005-2008. (In fact, the spending in the second quarter of 2007 alone eclipsed the full-year total for 2010.)
Looking deeper at last year’s activity of some of the key tech corporate buyers, we begin to see a partial reason for the muted overall spending, at least compared to pre-Crisis years. Yes, stalwarts like IBM and Hewlett-Packard continued their shopping sprees in 2010. Collectively, that pair announced 23 transactions worth a total of $11.1bn. But other tech bellwethers weren’t so quick to sign deals last year.
Microsoft announced just two purchases in 2010. Symantec sat out the entire second half of 2010 – a period, we might note, that saw its largest rival, McAfee, get snapped up. Cisco Systems did fewer deals in 2010 than in 2009. Included in the list of 2009 transactions for the networking giant were a pair of $3bn acquisitions (Starent Networks and Tandberg), while the largest deal Cisco announced last year was the $99m pickup of CoreOptics.
And although Dell was in the news often for M&A last year, both on successful and unsuccessful transactions, its overall activity basically kept pace with recent years. However, the company’s landmark purchase of 2010 (the $960m acquisition of Compellent Technologies) only ranks as the third-largest deal Dell has made since it jump-started its M&A program in mid-2007.
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.
Contact: Brenon Daly
Although most of the attention in Symantec’s quarterly report Wednesday night will be focused on the top and bottom line, we expect the company’s recent shopping spree to also come up. The storage and security giant announced three acquisitions in its just-completed quarter – more deals than it did in all of 2009. The bill for Big Yellow’s almost unprecedented M&A activity in the quarter came in at $1.65bn. As we recently noted, Symantec on its own has accounted for one-third of the spending for all security deals so far this year.
The biggest part of Symantec’s spending will go toward covering its purchase of the identity and authentication business from VeriSign, its largest transaction in more than a half-decade. (As a reminder, VeriSign’s business was running at about $370m, generating a very healthy $100m or so in cash flow each year.) Big Yellow has yet to close that deal, which was announced in mid-May, or offer specific financial projections for that business. Look for more information on that acquisition on the call tonight.
Symantec will be reporting its fiscal first-quarter results, which covers the second calendar quarter, after the closing bell. Analysts are projecting earnings of about $0.35 per share on revenue just shy of $1.5bn. However, we would note that rivals in each part of Big Yellow’s two main businesses have come up short of Wall Street expectations in their recent quarters. Two weeks ago, storage vendor CommVault indicated that sales had softened while just this morning, security rival Websense offered a disappointing earnings outlook. Websense shares were down more than 10% in midday trading.
Contact: Brenon Daly
Overall M&A is nowhere near the level it was in the boom days of 2007, but there is one sector where deal makers are actually more active than ever: IT security. So far this year, we’ve tallied 45 security acquisitions with an aggregate deal value of some $5.4bn. That is substantially higher than the same period in the previous two years, when the recession knocked M&A into a tailspin.
This year’s level of security M&A is even higher than the $3.7bn spent on 44 deals that we recorded in the same period in 2007, which was a record year for tech acquisitions. The activity in the sector stands out even more when we consider that, overall, deal makers have spent a total of just $80bn on transactions across all sectors so far this year – just one-third the level of spending at this point in 2007.
Perhaps the single biggest reason for the jump in spending so far this year has been the return to the market of Symantec. On its own, Big Yellow accounts for about one-third of the total shopping bill in the sector, having announced four deals valued at nearly $1.7bn in 2010. Included in that quartet of purchases is the pick-up of the identity and authentication business from VeriSign, which was Symantec’s largest single transaction since its misguided purchase of storage company Veritas Software in December 2004. It also announced a pair of deals for encryption vendors in a single day in April.
The other security deal this year we’d highlight is the planned take-private of SonicWALL. With an equity value of $717m, that’s the largest security LBO we’ve seen in some time. (For comparison, a year ago, the same buyout shop, Thoma Bravo, took digital identity firm Entrust private in a deal valued at just $124m.) Add in other smaller deals by McAfee, EMC, Oracle and Check Point Software, and the security M&A market has been busy this year. Given the strength of the sector and the broad base of buyers, we expect activity to remain brisk for the rest of 2010.
|Jan. 1 – June 14, 2010
|Jan. 1 – June 14, 2009
|Jan. 1 – June 14, 2008
|Jan. 1 – June 14, 2007
Source: The 451 M&A KnowledgeBase
Contact: Brenon Daly
When we look back at VeriSign’s two-year period of jettisoning unwanted businesses, we can only marvel at how it saved the best for last. The divestiture of its identity and authentication division to Symantec for $1.28bn caps a massive process of unwinding the previously misguided acquisitions of former CEO Stratton Sclavos. The longtime chief executive had used the money that gushed from VeriSign’s core registry business to buy his way into markets that were pretty far afield, such as mobile messaging and telecom billing.
Indeed, the scale of VeriSign’s divestitures is unprecedented among technology vendors, with the company dumping seven businesses in 2009 alone. (It’s interesting to note that while Morgan Stanley handled at least three of the divestitures last year, JP Morgan Securities banked VeriSign on the big sale of its security unit.) The company had seemingly wrapped up the grueling process last fall, telegraphing to Wall Street that it liked its two remaining businesses: registry and security. For that reason, the sale of the security division came as a bit of a surprise, the rumors of the divestiture earlier this week notwithstanding.
The sale also came at a substantial premium to virtually all of the other divestitures that VeriSign has closed. While the other divisions were lucky if they went for 1 times sales, the security business is going to Big Yellow for 3.5x sales. (More representative of the divestiture process is the 1x sales that VeriSign received when it sold its managed security services business to SecureWorks a year ago.) On a cash-flow basis, we understand that Symantec is paying about 10x EBITDA, which is roughly twice the valuation of most corporate castoffs.
As we see it, there are two basic reasons for the security division to fetch such a premium. For starters, it hummed along at a mid-20% operating margin. (Granted, that’s lower than VeriSign’s core registry business, but it’s still a level that most companies would envy.) But more importantly, we understand that Symantec actively sought out the VeriSign business, and indicated that it was a serious suitor right from the outset. Certainly, the pairing makes sense. As my colleague Paul Roberts points out, Symantec significantly bolstered its offering around cloud identity, broadening the reach of its policies around data protection, threat monitoring and compliance with enhanced authentication.
Contact: Brenon Daly
After its double-header encryption deals last week, Symantec appears set to return to M&A. Like a number of tech giants, Big Yellow largely shunned dealmaking last year. But the drop-off was particularly notable at Symantec: It spent more than $1bn on acquisitions in both 2007 and 2008, but less than $100m in 2009. We would hasten to add that in the fiscal year that just ended on April 2, Symantec generated $1.7bn in cash flow from operations. That brought its cash stash to more than $3bn.
As to where the company might be shopping, my colleague Paul Roberts in our Enterprise Security Program outlines five areas that make sense for Symantec to buy its way into – as well as who might be of interest in those markets. In a new report, Roberts looks for M&A activity from Symantec in the following areas: threat detection and reputation monitoring, SIEM and vulnerability management, enterprise rights management, database security and endpoint control. All of those areas are a long way from Symantec’s original market of antivirus software.
A final thought on Big Yellow and its possible shopping is that the company actually enjoys a fair amount of goodwill on Wall Street right now. Symantec’s fiscal fourth quarter, which it reported Wednesday, was surprisingly strong for many investors, particularly after rival McAfee had a less-than-stellar first quarter. In fact, on many trading screens Symantec was the only green stock Thursday on an otherwise blood-red day. Symantec shares closed up less than 2%, but that was on a day that saw the Dow Jones Industrial Average plummet almost 1,000 points, or 9%, in afternoon trading.
Contact: Brenon Daly
When companies look for an exit, there is usually door number one (IPO) or door number two (trade sale). But in some rare cases, it’s not either/or, it’s both. That’s playing out in two very different ways around Symantec’s acquisition of encryption vendor PGP. The purchase by Big Yellow was the first of a doubleheader day in which it also picked up its OEM partner, GuardianEdge Technologies. (Incidentally, the PGP buy was Symantec’s largest acquisition since reaching across the Atlantic for on-demand vendor MessageLabs in October 2008.)
But back to exits. With the sale of PGP, we expect the next big liquidity event for an encryption vendor to be the IPO of SafeNet. We’ve heard recent talk of an offering for the company, which was taken private by Vector Capital in early 2007. Since its buyout, SafeNet has done a few deals of its own, including the contentious acquisition of Aladdin Knowledge Systems in August 2008. We understand that SafeNet is running at north of $400m in revenue.
The sale of PGP also means that investment firm DE Shaw has now recorded one of each potential exit over the past month. In late March, portfolio company Meru Networks went public, and now fetches a market valuation of about $250m. (The offering by Meru came after many other wireless LAN providers got snapped up.) DE Shaw also owned a chunk of PGP, meaning it will also get a payday from Symantec’s $300m purchase of the encryption vendor.