In a note sent out to clients before the market closed Thursday, we speculated that Borland was likely to get a bid that topped its existing agreement with Micro Focus. (See the full post.) Shortly after the market closed, Borland indicated an unidentified suitor (Company A) raised its bid to $1.25 for each share of Borland, eclipsing the $1.15 per share that the boards of both Borland and Micro Focus have agreed to. Borland shareholders had been scheduled to vote on the deal, which was originally announced May 6, on July 22. The identity of Company A wasn’t revealed. In our earlier post, we noted our suspicions that the bidder might be Embarcadero Technologies, a portfolio company of Thoma Cressey Bravo. However, one informed source has subsequently told us that is not the case.
Tag: tech stocks
M&A for HR
Last February, EMC made the curious purchase of a tiny Seattle-based information management startup, Pi Corp, which had yet to release a product. We scratched our heads over the acquisition, in no small part because the release announcing the deal spent as much time talking about Pi’s leader Paul Maritz as it did about the company itself. That shopping trip in Microsoft’s neighborhood makes a lot more sense now that we know Maritz is taking over at VMware. Call it M&A for HR.
A 14-year veteran of Microsoft, Maritz is replacing Diane Greene, the founder and undisputed queen of VMware. (A person who worked under Greene but moved on to another virtualization company recalled recently that she had a say in essentially every aspect of the firm, down to picking out the door handles at its headquarters.) An engineer, Greene built one of the fastest-growing software companies. Just nine short years after its founding, VMware was able to push revenue to more than $1bn, finishing 2007 at $1.3bn.
Greene managed that tremendous growth despite an often tense relationship between VMware and its parent EMC. About the only knock on Greene’s leadership was her decision to sell VMware to EMC for $625m – a transaction that allowed EMC to reap billions of dollars of value creation at VMware, while essentially leaving the latter to operate on its own. Maritz is now charged with navigating that relationship, as well as parrying ever-sharper competitive threats, principally from his old employer and its release of Hyper-V. In terms of compensation, we can only hope Maritz didn’t load up his contract with VMware options. Otherwise, the new CEO may well find himself underwater during his time in the corner office. VMware shares sunk to their lowest-ever level in midafternoon trading Tuesday, plummeting 27% to $38.75.
How do you say ‘Tumbleweed’ in French?
About a year and a half ago, we heard Tumbleweed Communications was being shopped hard by private equity firms. The intervening credit crises – which bumped up the price of debt and trimmed the returns on LBOs – quite likely tabled any buyout. The email security vendor has struggled since then. It came up short of Wall Street estimates in every quarter in 2007. Shares that changed hands above $3 each in early 2007 dropped in a straight line to just above $1 this March.
Rather than a PE shop, however, it turns out Tumbleweed’s buyer will be the Sopra Group, a French IT consulting firm. Sopra will make the acquisition through its Axway subsidiary, paying $2.70 in cash for each share. With about 51 million shares outstanding, Tumbleweed gets a an equity value of about $138m, only slightly more than twice the sales it is expected to record this year. Sopra also got a discount from its currency: the Euro has climbed about 18% in value since we reported on Tumbleweed in February 2007. See full report.
Bottom-fishing by Blackbaud
In almost four years of going head-to-head on the Nasdaq, Kintera never challenged Blackbaud’s stock performance. In fact, it never even came close. An internally funded and smaller rival, Kintera actually jumped ahead of Blackbaud’s IPO by about six months. The company had to trim its offer price in late 2003 to get the IPO out the door, but shares nearly doubled shortly after they hit the market.
Once Blackbaud hit the market in summer 2004, however, Kintera had started a slide from which it would never recover. Blackbaud put Kintera out of its misery last Thursday, shelling out $46m for the struggling company. Kintera was actually in danger of getting delisted from the Nasdaq. (Evercore Partners once again banked Blackbaud, a mandate that we noted last year that has its roots in Redmond, Washington.)
The price values Kintera at basically 1x trailing 12-month sales, while Blackbaud trades at nearly four times that level. Even though Blackbaud didn’t overpay for Kintera, the market has expressed some concern about buying a damaged rival in a deal that will lower Blackbaud earnings this year. Blackbaud shares are down about 7% since announcing the deal.
Kintera is run as a public company, and its paltry exit price certainly won’t help rival Convio get its offering to market. The Austin, Texas-based company filed its S-1 in September and has amended it three times since then. So, it may well be getting ready to price. However, we would note that the income statement of Kintera matches up fairly closely with Convio – both posted revenue of about $45m in 2007, but had negative operating margins. Let’s just hope that the market doesn’t value Convio the same as it did Kintera.
Recent Blackbaud acquisitions
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Source: The 451 M&A KnowledgeBase
Taking stock
Pocketing equity as currency always makes a deal a little more dicey than a straight cash transaction. (Just ask Ted Turner, or any other shareholders – public or private – who got burned on post-sale stock distributions in the early part of this decade.) Those bitter memories – along with concerns about diluting existing shareholders – have pushed companies to hold on to their shares, rather than hand them out in acquisitions. Besides, many large tech companies are now on the other side of steep cost-reduction plans, which allows them to throw off hundreds of millions of dollars in free cash flow every quarter. That has swollen corporate treasuries to near record levels, in some cases.
Nonetheless, a few tech companies have been paying at least a part of their M&A bills with their own shares. In the three deals Omniture inked last year, the online business optimization vendor used its shares to cover more than half the cost of each deal. (The largest chunk of stock – $342m of equity to cover its $394m total purchase of Visual Sciences – is basically flat with the level where shares traded when Omniture closed the deal in mid-January.) Additionally, Ariba paid for half of its $101m purchase of Procuri with its stock. (Taking Ariba shares turned out to be a good bet for Procuri, since the stock has jumped 40% since the deal closed in mid-December.)
However, one deal that’s set to close at the end of business Thursday offers a reminder of the risks. Although Blue Coat Systems used all cash to buy Packeteer in its $268m purchase, it would have undoubtedly heard grumblings from Packeteer shareholders if it had done a stock swap. The reason? Just a month after announcing the deal, Blue Coat posted weak quarterly results and offered a tepid outlook for its business. That knocked the stock down 20% in one trading session. In this kind of uncertain market, cash may well be king.
Recent all-cash strategic deals
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Source: The 451 M&A KnowledgeBase
Creative destruction and its discontents
In a February 2007 report, we asked an egghead question about valuations in a sector that had been ‘creatively destroyed,’ to borrow Joseph Schumpeter’s oft-used phrase. At the time, we weren’t asking for purely academic reasons. Rather, we were trying to put a price on Tumbleweed Communications following Cisco’s purchase of rival anti-spam appliance vendor IronPort Systems. (Rumors had private equity firms looking at Tumbleweed.)
It turns out we weren’t far off in our valuation. We slapped a $150m price tag on Tumbleweed; last Friday, French IT consulting firm Sopra Group said it would pay $138m in cash for the company. The deal is expected to close in the third quarter. While the companies see a bright future for the combination, we have some reservations. Specifically, we wonder how Sopra, which is making the acquisition through its Axway subsidiary, will hit its target of 12-15% operating margins for the combined company next year. (Tumbleweed has run at negative operating margins for years, piling up an accumulated deficit of $300m in its history.)
Whatever the performance of Tumbleweed under its new owners, we have to say that Sopra certainly didn’t overpay for the company, which should double its sales here in North America. At just two times trailing sales, Tumbleweed was valued at less than half the price-to-sales multiple found in comparable transactions.
Anti-spam shopping
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*estimated, Source: The 451 M&A KnowledgeBase
Come on, Google, buy Salesforce.com already
Companies looking to get into new markets typically run the clichéd ‘buy, build or partner’ calculus on how to get the highest return on the lowest investment. Invariably, the answer is ‘yes’ to all of the options, as significant strategic moves require broad efforts to take the company in new directions.
Consider the case of Google and its still-emerging Apps business. (Like so much at the search engine company, there seems to be a ‘beta’ tag hanging on this division.) It has inked three deals for both technology and a sales channel, unleashed hundreds of engineers on the would-be ‘Office killer’ and, just recently, put together a distribution deal with Salesforce.com.
And yet, Apps still isn’t where Google needs it to be. Even more of a concern is that, in our opinion, the moves aren’t even enough to get Google Apps in a position to begin to challenge Microsoft Office. Google needs something more. In the end, a successful partnership isn’t simply about access. It’s about efficacy. In order for Google to control the Salesforce.com distribution channel, it has to control Salesforce.com. Read full report.
Learning Tree seeds sale
After more than 30 years in business, Learning Tree International has slapped a ‘for sale’ sign on itself. The IT training shop has retained RBC Capital Markets to guide the process, which comes as the company has only partly worked through a turnaround. It suffered through several years of stagnant revenue and negative operating margins, when the Internet bubble burst and companies cut back sharply on their IT staff members, which, at the time, were Learning Tree’s only customers. (The company has since expanded into management training as well.)
The timing of the possible sale is curious. Learning Tree has come up short of Wall Street estimates for two straight quarters, leaving the company’s stock below where it started the year. (Even with the bounce on May 28 from investors betting on an acquisition, Learning Tree shares have dropped nearly one-quarter of their value in 2008.) Learning Tree currently sports a market capitalization of about $290m, but holds $57m in cash and no debt, lowering its enterprise value to $233m. The company will likely record about $190m in sales in the current fiscal year.
Given the current valuation, maybe some of the executives should take a Learning Tree course on maximizing shareholder value. Of course, the top two executives have a distinct interest in maximizing shareholder value, given that they own nearly half of the company’s 16.6 million shares. Learning Tree cofounders David Collins and Eric Garen own 25.6% and 20.4% of the company, respectively. And if that weren’t motivation enough, we couldn’t help but notice a kicker that could put even more money into the executives’ pockets: The company approved a bonus of one year’s worth of salary for executive officers if Learning Tree gets sold before the end of next March. So, the sellers are ready, but where are the buyers?
i2: The king watches an auction
Nearly three years after getting re-listed on the Nasdaq, i2 Technologies may well find itself taken off the exchange again. While accounting mistakes got the supply chain software vendor bumped the first time, a sale of i2 is likely to end its 12-year run as a public company sometime soon. Having shopped itself for a year now, i2 said last week there are ‘ongoing talks’ with two interested parties.
In our view, a far more important sign that the company is ready to sell is the fact that it knocked founder Sanjiv Sidhu from his spot as chairman of the company. Removing Sidhu is key to getting any deal done, in our view, because few software executives have dominated their companies to the degree that Sidhu has at i2. He had served as the company’s chairman for two decades since cofounding i2 in a Dallas apartment. He only gave up the CEO title three years ago. (Not even an SEC investigation into shady accounting – and a subsequent $10m fine paid by i2 – could dislodge Sidhu from his seat of power earlier this decade.)
Of course, any deal for i2 still has to flow through Sidhu. He owns 5.5 million, or 26%, of the company’s 21.4 million shares outstanding. And while he may be content to let the company’s ‘strategic review’ drag on, other large shareholders may not be as patient. Hedge funds BlackRock and SAC Capital Advisors both own about 1.9 million shares of i2 and are likely to push the company to get a deal done. (JPMorgan is advising i2 in the process.) Despite the tight credit market, we still think i2 will get snapped up by a private equity shop rather than a strategic acquirer.
Taleo shops with Vurv
After sitting out an earlier wave of consolidation of on-demand human capital management (HCM) vendors, Taleo will spend roughly $129m in cash and stock for rival Vurv. The deal would double the number of customers at Taleo. The acquisition values Vurv at roughly 2.8 times trailing revenue, a bit lower than other recent HCM transactions. In mid-2006, three comparable deals got done at roughly 3-5 times trailing revenue and Taleo itself trades at about 3.7 times trailing sales. Since the consolidation wave hit the HCM sector two years ago, we have heard that Vurv was being shopped several times.
However, we would note that Taleo and Vurv have a fair amount of overlapping technology, particularly in the offering around employee recruitment. A similar transaction by the one-time HCM market darling, Kenexa, caused a number of integration headaches, which landed it in the penalty box on Wall Street. Kenexa shares currently change hands about 25% lower than they did in October 2006, when it grabbed ahold of BrassRing for $115m.
Significant HCM deals
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*Official 451 Group estimate. Source: The 451 M&A KnowledgeBase