Author: Brenon Daly

Wall Street upheaval hits league tables

Brenon Daly

The unprecedented upheaval Monday on Wall Street – with Lehman Brothers going under and Merrill Lynch forced into a distressed sale – will have echoes, large and small, for years to come. Tens of thousands of jobs have been thrown into question and tens of billions of dollars of value will have to be written off. On a minor scale, the historic changes will also cause a dramatic shakeup of our tech banking league tables. (See our executive summary of our 2007 league tables report.)

With its acquisition of Merrill, Bank of America has the chance – for the first time, really – to be a legitimate contender in tech banking. (Of course, much will depend on the sensitive task of retaining Merrill’s bankers and then building on practice.) On its own, BofA never cracked the Top 10, standing in 12th place in 2007 and 16th place in 2006. But if we added BofA’s deal totals in 2007 to Merrill’s business, the combined bank would have been ranked in fourth place, just ahead of Citigroup.

More dramatically, however, the disappearance of Lehman erases a perennially strong tech bank from the league tables altogether: Lehman ranked fifth overall in 2007, and fourth the year before. Moreover, it had continued that strong run into this year, having a hand in 24 deals with an aggregate disclosed value of $77bn. For instance, Lehman had the sole mandate in the $162m sale of Iona Technologies to Progress Software and Eagle Test Systems’ $250m sale to Teradyne, as well as co-adviser roles on ChoicePoint’s $4bn sale to Reed Elsevier and Hewlett-Packard’s $13.9bn purchase of EDS. Those are among the tombstones for now-deceased Lehman.

R.I.P: Lehman’s advisory credits

Year Deal volume Aggregate announced deal value
2006 34 $143bn
2007 30 $66bn
YTD 2008 24 $77bn

Source: The 451 M&A KnowledgeBase

Citrix sits out

Brenon Daly

Since announcing its landmark acquisition of XenSource a little more than a year ago, Citrix has largely taken itself out of the M&A market. And don’t expect that to change anytime soon. CFO David Henshall told the Deutsche Bank Technology Conference earlier this week that the company ‘has its hands full’ with working out its virtualization strategy, which it grandly refers to as a datacenter-to-desktop offering. (That strategy largely reflects the fact that VMware, with an estimated 85% of the server virtualization market, isn’t as vulnerable as Citrix initially thought, at least around ESX.)

While Citrix has inked three deals since XenSource, the acquisitions have been quiet technology purchases. For instance, in January Citrix snagged a product line from FullArmor, a self-funded business process orchestration tool vendor, and in May it added Sepago, a 30-person company that only launched a product a year ago after a few years as a consulting shop.

Instead of spending on M&A, Citrix’s Henshall indicated that the company will continue to put much of the cash it generates ($75-100m each quarter) toward buybacks. If nothing else, Citrix has been getting a relative bargain in the buyback. After two straight earnings warnings earlier this summer, shares sank to their lowest level in almost three years. Around that same time, perhaps not coincidentally, rumors began to surface that Cisco or IBM might be shopping Citrix. If Citrix does get acquired, we still think the deal will flow through Redmond, with Microsoft to reach for its longtime partner to shore up its own virtualization offering.

Citrix deal flow

Year Deal volume Deal value
2008 2 Not disclosed
2007 5 $500m
2006 3 $117m
2005 2 $338m

Source: The 451 M&A KnowledgeBase

CA: Ghosts of deals past

Brenon Daly1 Comment

When CA Inc opens the doors for its annual meeting today, we expect there will be more than a few ghosts floating around the hallways at the company’s Long Island headquarters. CA, which has been under one form of investigation or another for much of this decade, can’t seem to leave the past behind. Just last week, in a sort of Shakespearian development, the former chief executive, currently in jail, lobbed the charge that the company’s board and other executives knew all about the book-cooking. Sanjay Kumar may have initially taken the fall for the company’s ’35-day months,’ among other shady accounting practices. But now he’s looking to drag others down.

We mention the latest courtroom contretemps because we have the sense that it has taken CA out of the M&A market. CA, which typically buys a handful of companies each year, hasn’t inked a deal since July 2006. (One of those acquisitions, in the late 1980s, actually brought Kumar to CA.) While we have heard rumors that CA may be on the verge of ending the two-year drought, nothing has been closed. (One set of rumors had CA looking at acquiring a systems management vendor.) Further, a few conversations with bankers indicate that not many of them are bothering with a trip out to Long Island to pitch possible deals. That’s understandable, since the company’s lawyers are probably too busy with other matters to look at a deal book.

CA deal flow

Year Deal volume
YTD 2008 0
2007 0
2006 6
2005 6
2004 3
2003 4

Source: The 451 M&A KnowledgeBase

A battlefield Exchange

Brenon Daly

As the world’s largest and richest software company, Microsoft gets a lot of targets hung on it. Companies of all sizes are drawing a bead on Microsoft, whether it’s a startup looking to undercut or outperform one product or a fellow tech giant deciding Microsoft is making too damn much money on some particular line of business and buying a competing offering. (There are a lot of those cash-rich products at Microsoft, which hums along at an astounding mid-30% operating margin overall.)

Consider who’s been targeting Microsoft Exchange Server lately. In the last year, tech heavyweights Yahoo and, most recently, Cisco have both inked multimillion-dollar deals that allow them to offer a way around Exchange. The goal: siphon off some of the more than $1bn in high-margin revenue that flows to Microsoft from its email and collaboration server product line.

The first shot was fired almost exactly a year ago, when Yahoo spent $350m for Zimbra. (As a side note, it would have been interesting to watch how Microsoft – if its planned $44.5bn purchase of Yahoo had gone through – would have killed off Zimbra. We’re guessing it would have immediately and forcefully ‘cut off the air supply,’ to borrow a time-honored strategy in Redmond.)

In a direct echo of that deal, Cisco went shopping two weeks ago and found its own Linux-based replacement for Exchange, paying $215m for PostPath. Cisco says it picked up the five-year-old company, which had pocketed about $30m in venture backing, to enhance the email and collaboration tools available in WebEx.

Whatever the motivation, we’re guessing that at least one of PostPath’s board members may be relishing the chance to stick it to Microsoft. Bob Lisbonne, who led Matrix Partners’ investment in PostPath, spent a half-decade at Netscape, including the time in which Microsoft was trying to ‘cut off the air supply’ of the browser pioneer. Not that business is ever personal, of course.

Going after Exchange

Date Acquirer Target Price
September 17, 2007 Yahoo Zimbra $350m
August 28, 2008 Cisco PostPath $215m

Source: The 451 M&A KnowledgeBase

Spending the ‘divestiture dividend’

Brenon Daly

On the same day it closed the divestiture of its authentication business, Secure Computing said it will pay $15m for Securify. The deal, which is expected to close in the fourth quarter, also has a potential $5m earnout. Secure said it plans to add Securify’s identity-based monitoring and control technology to its firewall. The majority of Securify’s customers are government, and Secure Computing plans to cross-sell into that market. Founded in 1998, Securify had raised more than $70m in VC. However, it only generated about $13m in revenue last year. Secure Computing indicated the acquisition would boost earnings next fiscal year.

Open Text crashes LBO party (again)

Brenon Daly1 Comment

For the second time in as many years, Open Text has topped a buyout shop to take home a struggling enterprise content management (ECM) vendor. In mid-2006, Open Text crashed a planned take-private of rival Hummingbird by Symphony Technology Group, along with financial backer Tennenbaum Capital Partners. To land Hummingbird, Open Text ended up paying about $18m more than the buyout firm had offered.

Open Text won’t have to reach nearly as far into its pockets this time around. On Thursday, the company bid $4.80 per share of Captaris, valuing the document capture technology vendor at $131m. That’s only a $1.4m – or less than 1% of deal value – bump over an existing offer from buyout firm Vector Capital. Vector made the offer of $4.75 per share of Captaris in March, six months after it began pushing the company to sell.

By the time Vector met with Captaris, it had snapped up about 2.7 million shares, or about 10% of the company. However, according to an SEC filing on its purchases, Vector paid around $5 per share. It’s hard to see how the buyout firm is going to be too far above water on its Captaris holdings, given the $4.80 per share offer from Open Text. As a final note, we close with the fact that if Vector had just bought a slug of Open Text stock when it started buying Captaris shares, it would be up nearly 40% on that holding. We know Vector isn’t a money management firm, but in this case, it would have been better to buy the buyer, rather than the seller.

Buying and building at Google

Brenon Daly

Since the beginning of 2007, Google has spent nearly $3.5bn on research and development. The freewheeling company, which makes liberal use of the ‘beta’ tag for many of the in-house projects it rolls out, often goes to great pains to present a corporate portrait of uninhibited engineers running wild on their whiteboards, coming up with the next Great Idea. (All the while, founders Sergey and Larry benevolently look on.)

With all the building going on at Google, it’s easy to lose sight of the fact that the company is also buying. In fact, since the beginning of 2007, Google has averaged about a deal a month. That’s about the same acquisition pace as both Cisco and Oracle over the last 18 months, although the sizes of the deals – and the rationale – are very different. Google, for instance, has never purchased a public company.

Instead of the consolidation plays inked by other large vendors, Google tends to pick up small bits of technology or even a team of engineers that the company can eventually turn into a product. Sometimes, the acquisitions show up directly in Google products, such as its mid-2005 purchase of Android Inc. At the time, Android was reportedly working on an operating system for mobile phones, which Google officially unveiled last November. Another example is Google’s purchase in November 2006 of iRows, which became the spreadsheet offering in Google Docs.

Other Google purchases show up only as features in more significant offerings. In May 2007, for instance, Google picked up GreenBorder Technologies, a small company with a fitful history and a doubtful commercial outlook, but some solid technology. Specifically, GreenBorder developed a virtualized browser session, which isolated any browser-based security threats from the user’s computer.

However, not much had been seen from this ‘sandbox’ technology over the past year. At least, not until Google rolled out its new Chrome browser on September 1. One of the key selling points of the would-be killer of Internet Explorer: security. According to Google, Chrome prevents malware from installing itself on a computer through a browser as well as by blocking one tab from infecting another tab. In our opinion, it won’t take many people switching to Chrome to justify the $20m-30m we estimate Google spent on GreenBorder for that acquisition to pay off.

Google deal flow

Year Deal volume
YTD 2008 3
2007 15
2006 11
2005 6
2004 3

Source: The 451 M&A KnowledgeBase

Chipping away

Brenon Daly

It’s one down and (at least) one to go for AMD. The battered chip maker moved earlier this week to dump its digital TV (DTV) chip business to longtime partner Broadcom. AMD will pocket $193m in cash from the divestiture. Although the unit had been on the block for some time, AMD got a decent price for the cast-off. We understand the DTV unit was generating in the neighborhood of $150m in sales, meaning AMD got more than the typical ‘1x and done’ divestiture multiple. Further, we would note that the valuation of the DTV business at 1.3x sales is about twice AMD’s own price-to-sales valuation.

With one of the legacy ATI Technologies businesses off the books, AMD can move on to unwinding yet another part of that disastrous acquisition. (Since AMD spent $5.4bn in cash and stock on graphics chip company ATI two years ago, shares of the second-largest chipmaker for computers have plummeted 70%.) The next unit on the auction block: Processors for multimedia applications that run on mobile phones. Rival Intel made a similar move two years ago, selling its communications processor unit to Marvell Technology for $600m, which valued the unit at an estimated 1.5x sales. We suspect AMD would be perfectly happy with that kind of valuation in any divestiture of its mobile business. As to who might be on the other side of the deal, two companies come immediately to mind: Qualcomm is always on the lookout for more IP, and communications chipmaker Atheros has done three acquisitions in the past two years and is said to be looking for more.

Hiring bankers

Brenon Daly

Once thought to be just part of the broader ERP offering, the so-called human capital management (HCM) market has come into its own in recent years. That has meant a few IPOs (going back to when there was a market for the offerings) as well as two or three HCM deals each year worth more than $100m. Recently, those twin threads came together in HireRight. The $195m acquisition of that company, which sells pre-employment screening software, closed earlier this month, almost exactly a year after the company went public.

In addition to the acquisition of HireRight by a private company serving the US government, we also noted one of the largest deals for market consolidation earlier this summer when Taleo spent $129m for longtime recruiting software rival Vurv Technology. (As opposed to consolidation, earlier HCM deals were typically done as a way for the acquirer to get into new markets or expand its product portfolio, such as outsourcing giant ADP spending an estimated $160m two years ago for Employease, an on-demand HCM vendor focused on the midmarket.)

So what does HCM deal flow look like for the rest of the year? Salary.com, which picked up a small British firm on Tuesday, has indicated that it plans to ink another deal or two before the year is out. Salary.com went public last year and has done two deals since then, including this week’s $5m purchase of InfoBasis.

More intriguing, however, is the rumor we heard from two market sources that PreVisor, a PE-backed HCM vendor selling employee screening and testing software, is looking to sell. The company was formed in August 2005 through the combination of three companies, and it has done a handful of acquisitions since then. There is no initial word on who might be bidding on PreVisor, which is owned by Veronis Suhler Stevenson.

HCM deal flow

Period Deal volume Deal value
Jan.-Aug. 2006 45 $617m
Jan.-Aug. 2007 35 $2bn
Jan.-Aug. 2008 26 $511m

Source: The 451 M&A KnowledgeBase

Corporate castoffs

Brenon Daly

Look who’s hitting the corporate garage sales these days – other corporations. While divestitures used to go most often straight to private equity shops, more than a few castoff businesses are now finding homes inside new companies. The latest example: AMD’s sale of its digital TV chip division Monday to Broadcom for $193m.

Given AMD’s struggles, as well as the fact that rival Intel has shed a number of businesses in recent years, the divestiture wasn’t a surprise. In fact, my colleague Greg Quick noted two weeks ago that AMD was likely to dump its TV chip business, naming Broadcom as one of the likely acquirers.

On the buy side, Broadcom joins fellow publicly traded companies Overland Storage, L-1 Identity Solutions and Software AG, among others, that picked up properties from other listed companies this year. That’s not to say that buyout firms have been knocked out of the market, despite the tight credit conditions. PE shops Vector Capital, Thoma Cressey Bravo and Battery Ventures have all taken businesses off the books of publicly traded companies in 2008.

Still, the activity by the corporate shoppers is noteworthy. And the list is likely to grow as more companies look to clean up their operations during the lingering bear market. The next name we may well add to the list is Rackable Systems, which said earlier this month that it is looking to shed its RapidScale business. (The divestiture would effectively unwind its acquisition two years ago of Terrascale Technologies, and comes after a gadfly investor buzzed Rackable for much of the year.)

As to who might be eyeing the assets, we doubt there are many hardware vendors interested in RapidScale, because they have either made acquisitions (Sun’s purchase of Cluster File Systems, for instance) or have partnerships (both EMC and Dell partner with Ibrix). However, a service provider could use the technology to enhance its storage-as-a-service offering. In a similar move, we’ve seen telecom giants like BT and Verizon pick up security vendors to offer that as a service. And finally, we’d throw out a dark horse: Amazon, which is one of Rackable’s largest customers, could use RapidScale’s clustered storage technology to bolster its S3 offering.