Author: Brenon Daly

Who’s not shopping for Epicor

Brenon Daly1 Comment

In virtually any other credit market, we’d be tempted to hold out old-line ERP vendor Epicor Software as an exemplary buyout candidate. The company will do about $530m in revenue this year, with $200m of that coming in the easily bankable form of software maintenance fees. (And the company is hardly expensive, with an enterprise value that’s just 3.7x this year’s maintenance revenue.) Moreover, it’ll throw off some $65m in cash flow in 2008 to help cover a hypothetical leveraged buyout.

But as we said, these are not normal days for debt. So in our report last week on an activist hedge fund pushing the company to pursue ‘strategic alternatives,’ we focused on the strategic buyers that might be interested in – and could afford – Epicor. They are, in order of likelihood: Microsoft, Oracle and SAP. Truth be told, though, none of those acquirers seems likely. And while we’re scratching potential suitors for Epicor, we can go ahead and erase M2 Technology Partners.

The buyout firm, which launched in mid-June with backing from Accel-KKR, is headed by Mark Duffell and Michael Piraino, who served as Epicor’s COO and CFO, respectively, until earlier this year. We understand that M2 is exploring other opportunities in the business applications market, and may well have its inaugural investment signed, sealed and delivered by the end of the year. It won’t be Duffell and Piraino’s old shop Epicor, but just think how much time they’d save on due diligence if it were.

Significant ERP deals

Date Acquirer Target Price
December 2000 Microsoft Great Plains Software $1.1bn
May 2002 Microsoft Navision $1.3bn
June 2003 PeopleSoft JD Edwards $1.75bn
December 2004 Oracle PeopleSoft $10.46bn
June 2005 Lawson Intentia International $449m
November 2005 Golden Gate Capital Geac Computer $1bn
January 2008 Unit 4 Agresso Group Coda $314m

Source: The 451 M&A KnowledgeBase

Standstill around the lamp

Brenon Daly

After a few months of pointed exchanges, Aladdin Knowledge Systems and its would-be buyer, Vector Capital, have agreed to a standstill in an attempt to negotiation a deal. Vector, the encryption vendor’s largest shareholder, had been pushing for a shareholder vote on Oct. 23 on its plan to replace three of Aladdin’s five board members. The buyout firm has set aside that demand, as well as agreeing not to unload any of its 14% holding. For its part, Aladdin agreed to sign a confidentiality agreement with Vector, and will not to seek another buyer for part or all of its business. Last month, Vector offered $13 for each share of Aladdin; the stock currently trades above that. The standstill gives the two sides at least a month to work out a deal, as Vector can’t call for another shareholder meeting until Oct. 30 at the earliest.

Tombstones for a law firm

Brenon Daly

As if the recent bankruptcy of one investment bank and hasty sale of another wasn’t disruptive enough to current deal flow, we now have yet another major M&A adviser headed toward breakup. Only this time, it’s a law firm: Heller Ehrman indicated that it will dissolve on Friday. Unlike the banks, however, the winding down of Heller Ehrman was not caused by the current upheaval on Wall Street. Instead, the San Francisco-based law firm, which traces its roots back to 1890, has been slumping since the end of last year, as partners defected amid a slight dip in revenue in 2007.

Like its financial brethren, Heller Ehrman had clients across industries, with a significant technology practice. The firm worked on 42 tech deals last year, including IronPort Systems’ $830m sale to Cisco in January, Hewlett-Packard’s $1.6bn purchase of Opsware, Autonomy Corp’s $375m acquisition of Zantaz and the $200m leveraged buyout of Embarcadero Technologies. Overall, Heller Ehrman tied for fourth-busiest law firm in terms of tech deals, according to our rankings.

Legal league tables, 2007 deal volume

Rank Firm Number of transactions
1 DLA Piper 63
2 Cooley Godward 61
3 Jones Day 57
4 (tie) Heller Ehrman/O’Melveny & Myers 42

Source: The 451 M&A KnowledgeBase

Transmeta: No money? No credit? No problem

Brenon Daly

Just how desperate is Transmeta to get sold? Well, the pitch from the former high-flying semiconductor IP vendor now sounds like something we usually hear on late-night TV: easy financing. (‘No money? No credit? No problem. At Transmeta, we’re ready to do a deal with you.’) And honestly, that’s one of the only selling points left at the company, which retained Piper Jaffray six months ago to advise it on a possible sale. On Wednesday, Transmeta removed the word ‘possible’ and said it was starting the sale of the company. Shares jumped 20%, giving Transmeta a market capitalization of about $200m.

The financing comes into play because Intel, which had been slated to pay $100m to Transmeta in equal installments over the next five years, is writing a lump-sum check for $92m in the next few days. That’s on top of the $150m Intel has already paid to settle a patent lawsuit with Transmeta. As the company has noted, the settlement ‘strengthens’ its balance sheet, which effectively greases a deal by having the cash on hand to finance a transaction. Given the frozen credit markets, that’s not insignificant.

As to who might buy Transmeta, a year ago my colleague, Greg Quick, tapped Advanced Micro Devices as the most-obvious buyer. AMD, which licenses Transmeta technology, also owns a stake in Transmeta through its purchase of a block of preferred shares last year. Other companies that license Transmeta technology, including Sony, Toshiba and Fujitsu, also might be interested but are probably long shots. Whoever does end up buying Transmeta will get a bargain on the company, which never lived up to its hype. Transmeta’s sale price is likely to be in the neighborhood of one-tenth of the company’s valuation at its IPO eight years ago.

Microsoft’s ‘paper’ trail leads to Citrix?

Brenon Daly

Shares of Citrix jumped 5% Wednesday on reheated rumors that Microsoft may be bidding for its longtime partner. Volume in Citrix shares was about 50% heavier than average. One source indicated that Microsoft would be paying $36 for each Citrix share, which is essentially where Citrix started the year.

This rumor, of course, has made the rounds before. We noted in April that although both IBM and Cisco were rumored suitors for Citrix, our top pick for the acquirer would be Microsoft. (The two companies have been close for years, with Citrix being one of just two companies with access to the Windows source code.) All that said, however, we don’t see Microsoft buying Citrix. (How would Microsoft handle the fact that XenSource, which is arguably Citrix’s most-coveted asset, is built on open source software?)

As to why the rumor resurfaced Wednesday, we might trace that back to a misread of Microsoft’s announcement the day before that it was planning to sell some $2bn of commercial paper. The thinking is that Redmond might be prepping an even larger offering. But looking at Microsoft’s current balance sheet, it could buy Citrix four times over with the cash and short-term investments it already holds.

Preferred gets preference

Brenon Daly

Even with McAfee’s offer of $5.75 in cash for each share of Secure Computing representing a premium of about 27% over the previous close, many Secure shareholders are underwater. In June, Secure sank to its lowest level in six years, part of a slide that has seen some 40% of its market value erased this year. The decline left the company trading at just 1x revenue. (When it shed its authentication business at the end of July, we noted that the divested unit sold for twice the valuation of the remaining Secure business, a highly unusual situation in corporate castoffs. We also asked if the move wasn’t a prelude to an outright sale of the company.)

It turns out, however, that the stock’s decline didn’t really affect Secure’s largest shareholder, Warburg Pincus. The private equity firm took a $70m stake in Secure in January 2006. (Secure took the money to help it pay for its mid-2005 purchase of CyberGuard.) Yet, because of the way Warburg structured its purchase, the shop ended up making money on its holding. That’s true even though Secure stock, even with McAfee’s offer, is some 60% below where it was when Warburg took its stake. (Shares changed hands at $14.40 each when Warburg picked up its holding, although the conversion price was adjusted slightly six months later to offset the potential dilution caused by Secure’s cash-and-stock purchase of CipherTrust.)

In the end, Warburg pocketed $84m from McAfee for its Secure holdings, which were largely made up of series A preferred shares. Having put $70m into Secure, and then seen the shares sink, we guess Warburg is probably content to book even a slight gain on its investment.

Battle set for Aladdin’s lamp

Brenon Daly1 Comment

In contrast to the LBO of data encryption vendor SafeNet a year-and-a-half ago, Vector Capital’s latest effort to take an IT security company private has been a more contentious process. After a series of public and private exchanges with Aladdin Knowledge Systems, Vector, through a subsidiary, called for a special meeting of shareholders to vote on the buyout firm’s plan to replace three of the company’s five board members. On Thursday, Aladdin agreed to the vote, setting October 23 as the date for the proxy showdown.

Vector is currently Aladdin’s largest shareholder, with a 14% stake (Aladdin insiders hold about 20%). The buyout firm began picking up shares earlier this summer at about $9 per share. It quickly piled up a 9% stake, and has since bumped it up to 14%. Along the way, we understand it made numerous private offers to buy the company and then disclosed in late August a public offer to buy the rest of the company at $13 per share. While Vector’s offer represented a 40-50% premium from when the firm started buying, Aladdin shares have ticked above the offer, changing hands at $13.80 in mid-Friday trading.

The unsolicited bid from Vector didn’t go over well with Aladdin. The company has dismissed it as ‘opportunistic’ but hasn’t said much more than that. Behind the scenes, Aladdin has carped that the only party that stands to gain from Vector’s bid is Vector, either by picking up Aladdin on the cheap or disrupting Aladdin’s business enough that it would benefit rival SafeNet, a Vector portfolio company. Investors, who have seen Aladdin shares shed as much as two-thirds of their value since last October, may not be so dismissive of the floor price set by Vector. (They are also mindful of what might happen to their holdings if Vector – stymied in its efforts to ink a deal – gets rid of its 14% stake of Aladdin. Look out below.)

In the month remaining before the vote, we suspect the jabbing and jockeying between Aladdin and Vector will increase. Israel-based Aladdin recently retained the PR firm Joele Frank, Wilkinson Brimmer Katcher, which is basically the go-to shop for companies caught in a bear hug, to get its side of the story out. But the company, along with all of its flaks, faces an experienced bidder. Not only has Vector pushed through unsolicited bids in the past, one of the partners working on the firm’s efforts, David Fishman, has worked on the other side of the table. Before joining Vector, Fishman was a banker at Goldman Sachs, where he worked on a number of defensive deals, including PeopleSoft’s attempted stiff-arm of Oracle. We’re pretty confident that no one involved in this transaction wants to repeat the nastiness of Oracle’s hostile run at PeopleSoft.

Instant investment banks

Brenon Daly

We wrote earlier this week that Bank of America’s pending purchase of Merrill Lynch gives the Charlotte, North Carolina-based giant its first real opportunity to pick up M&A advisory work in the tech market. Well, that assessment goes double for Barclays, which plucked Lehman Brothers’ banking unit out of the rubble, and it goes triple for whichever bank – if any – snags perennial tech powerhouse Morgan Stanley. (Reports on Thursday indicated that Morgan Stanley was holding talks with Wachovia, as well as considering a sale to a European institution.)

Of course, the tech M&A business is just a side-note in the unprecedented consolidation of investment banks that’s played out this week. But it’s one that shouldn’t be overlooked. Deal flow in the tech sector has approached a half-trillion dollars in each of the past two years. Even during an off-year like 2008, we’ve already seen some $250bn worth of transactions, more than the full-year total in 2004. That’s a lot of banking fees.

To be sure, there will be a substantial amount of disruption in the tech banking business as the new owners integrate the formerly independent investment banks. (For instance, LogMeIn, which filed to go public in January, still has Lehman listed as its lead underwriter. Lehman’s new owner, Barclays, is hardly known for its equity underwriter business, much less underwriting tech offerings.) But at the very least, the acquiring banks picked up the opportunity to be relevant in a market where deals worth hundreds of billions of dollars are going to get done each year. And, thanks to these historic times, they got the chance on the cheap.

A flash-y, low-ball bid

Brenon Daly

SanDisk shot down a $5.85bn all-cash unsolicited bid from Samsung Electronics, saying the bid by the South Korean electronics giant doesn’t reflect the full value of flash memory provider. Despite the rejection, SanDisk shares surged 39%, closing at $20.92. Samsung bid $26 for each share. Last October, SanDisk shares changed hands above $50. Samsung made its offer public after saying four months of talks had come to nothing. SanDisk posted a loss and a sales decline last quarter. The company projects revenue for the current quarter will drop about one-quarter from last year. Included in SanDisk’s revenue is several hundred million dollars that Samsung pays SanDisk each year for patent royalties.

Vector’s velocity

Brenon Daly

With all the bidding and buying, it’s hard to keep straight what’s going on with Vector Capital. Already this year, the tech buyout shop has made several offers for down-and-out companies. It even got one through last week, as portfolio company Tripos announced a $57m purchase of drug development software maker Pharsight. The deal is expected to close by year-end.

However, Vector’s other recent M&A moves, most of them coming as unsolicited offers, haven’t been as straight-forward. It made an on-again, off-again run this summer at Corel, a half-decade after taking it private and two years after spinning it back onto the public market. (We would note that Corel shares have never traded as high as they did at the IPO in spring 2006.) Vector also bid for troubled content management vendor Captaris, but lost out to the acquisition-hungry Open Text. The $131m deal is expected to close before year-end, and Captaris shares are trading as if the transaction will go through.

In addition to those mixed efforts, Vector has made an unusual two-pronged approach at Israeli security company Aladdin Knowledge Systems. First, it offered to buy Aladdin outright, offering $13 for each share it doesn’t already own. (Vector is Aladdin’s largest shareholder, holding some 14% of the company.) Then, Vector offered to pick up just Aladdin’s digital rights management (DRM) business. The DRM business is the most-attractive unit at Aladdin, and would fit nicely with SafeNet, which Vector took private last year. Perhaps not surprisingly, Aladdin has said ‘thanks, but no thanks’ to both unsolicited options, and has retained Credit Suisse to advise it.

Selected Vector transactions

Year Company Price Market
2008 Precise Software (Symantec) Not disclosed Application performance management
2007 SafeNet $634m Encryption security
2006 Tripos $26m Pharmaceutical industry software
2003 Corel $122m Desktop productivity software

Source: The 451 M&A KnowledgeBase