Author: Brenon Daly

Big, happy family or favorite child?

Brenon Daly

For an executive who learned the ropes from Larry Ellison, Marc Benioff has adopted a very ‘un-Oracle-like’ approach to M&A. Since the company he founded, Salesforce.com, went public in mid-2004, Benioff has inked just five deals. The total shopping bill: less than $100m. Oracle, on the other hand, hardly touches a deal worth less than $100m. In the same four-year period that Salesforce.com has been public, Oracle has closed 45 deals with an announced value of more than $30bn.

Of course, the two companies are in very different stages of their lives, which goes a long way toward shaping their M&A activity. While Ellison and Oracle look to consolidate huge blocks of the software landscape, Benioff and Salesforce.com target tiny technology purchases that allow them to extend their on-demand offering to new markets. We saw that with Salesforce.com’s purchase last year of content management startup Koral, which had just nine employees. And on Wednesday, Salesforce.com announced its largest deal so far, spending $31m on call center software vendor InStranet.

But we would add another – perhaps less obvious – reason for the rather shallow deal flow at Salesforce.com. In many ways, the company is caught between shopping and partnering. In an effort to get a richer valuation, Salesforce.com has pushed Force.com and AppExchange as a way to be viewed as a platform company, rather than merely an applications vendor. (That effort got a big boost this week from Dell, which said it will be developing applications on the Force.com platform over the next three years.)

However, the very success of these efforts helps to explain why Salesforce.com has to keep its checkbook in its pocket when shopping. It can either focus on building out its platform or it can focus on deal-making – it can’t do both. By design, platforms are broad, open and inclusive, while M&A necessarily involves selecting one above all others. Benioff can’t pick a favorite child and expect to have a big, happy family.

To illustrate the dilemma, consider the situation concerning sales compensation, a line of business that’s a logical extension of Salesforce.com’s core CRM product and one the company could easily buy its way into. Indeed, there are already more than a half-dozen companies offering their sales compensation products on AppExchange. But imagine if Salesforce.com decided to buy one of the vendors, say Xactly Corp. Obviously, that purchase would alienate AppExchange rivals like Centive and Callidus Software, which would probably pull their offerings from AppExchange the day the deal was announced. Salesforce.com may well make up that immediate loss of revenue down the line. But as indicated by Wall Street’s brutal reaction Thursday to the company’s second-quarter report, it’s best not to tamper with the top line.

Salesforce.com: an unwilling buyer

Announced Target Deal value Target description
Aug. 2008 InStranet $31.5m Customer service automation
Oct. 2007 CrispyNews Not disclosed Community news, website development
April 2007 Koral $7m* Web content management
Aug. 2006 Kieden Not disclosed Search engine marketing management
April 2006 Sendia $15m Wireless application developer

*451 Group estimate, Source: The 451 M&A KnowledgeBase

Signing off on a deal

Brenon Daly

The bear just keeps grumbling – and we don’t mean the bear market. Instead, we’re talking about the all-the-rage bear hugs that companies are giving each other. The latest: Nuance Communications’ $40m unsolicited offer for Zi Corp. (Incidentally, the new hostilities come as a pair of previous unsolicited deals – Cadence Design Systems’ run at Mentor Graphics and Electronic Arts’ move on Take-Two Interactive – head toward largely civil conclusions.)

Nuance’s offer is a classic opportunistic squeeze play, right down to the timing. The acquisition-hungry company launched the bid just hours after Zi reported second-quarter results that did nothing to shore up its already weak standing on Wall Street. (Among the lowlights for Zi: Sales in the second quarter fell by one-third, and it burned through half its cash, which fell to just $2.6m from $5m at the beginning of the year.)

Still, Nuance sees some value in Zi, and Chris Hazelton, who heads up The 451 Group’s Mobile Practice, agrees. He notes that Zi’s handwriting-recognition technology would complement Nuance’s existing mobile offering. Handwriting recognition is particularly important in Asia, where symbols rather than letters are used in many writing systems. Of course, Asia is also a booming market for mobile products.

Nuance has already shown that it’s ready to go shopping in the mobile market. About a year ago, it spent $265m for Tegic Communications to get a keypad technology platform. And make no mistake, mobile is becoming an increasingly important slice of business for Nuance, which was formerly known for basic speech recognition on PCs. In Nuance’s most-recent quarter, revenue in its mobile business grew more than twice as fast as overall revenue, and the company projected that the division would account for 20% of total sales in the current fiscal year, up from just 13% last year.

We wouldn’t be surprised in the least if Nuance ended up ahead of its projection for its mobile business. The reason: We fully expect it to acquire Zi, which would add about $15m to the top line. Zi doesn’t want to sell – and told Nuance as much in an SEC filing – but we wonder how long the money-burning company can fend off Nuance. We’re guessing most Zi shareholders, who saw the stock sink to just 30 cents earlier this month, would like Zi to use its handwriting technology product to sign off on Nuance’s bid of 80 cents per share.

Selected unsolicited tech deals

Date launched Bidder Target Status
Aug. 2008 Nuance Zi Corp Zi has declined to negotiate
June 2008 Cadence Design Mentor Graphics Cadence dropped bid last week
May 2008 Barracuda Networks Sourcefire Sourcefire has declined to negotiate
March 2008 EMC Iomega EMC closed acquisition a month later
Feb. 2008 Electronic Arts Take-Two Interactive EA dropped tender offer, but talks continue
Feb. 2008 Microsoft Yahoo Microsoft dropped bid after three months

Source: The 451 M&A KnowledgeBase

Cadence ends hostilities

Brenon Daly

Cadence Design Systems unexpectedly yanked its two-month-old unsolicited bid for rival Mentor Graphics Friday, scrapping a deal that would have given the chip design industry some much-needed consolidation. In pulling the $1.6bn all-cash offer, Cadence blasted Mentor for refusing to open its books. According to Cadence, that prevented it from lining up lenders to cover the $1.1bn it was planning to borrow for the deal. Mentor disputed that. It added regulatory review would have likely dragged out the process. Whatever the case, Mentor investors didn’t stick around. Mentor stock plummeted 26% to close at $10.33, compared to Cadence’s offer of $16 per share. For its part, Cadence stock rose 7%. Still both stocks are below the level they were when the dance began.

Meru: Nasdaq or bust

Brenon Daly

At the rate networking companies are consolidating, there may be no one left to buy Meru Networks. Earlier this week, Hewlett-Packard satisfied its appetite for WLAN equipment by acquiring Colubris Networks. That deal comes just two months after rival Trapeze Networks got snapped up by Belden, a cable and wiring company.

But the deal that probably scotched any potential trade sale for Meru was Brocade’s $3bn gamble on Foundry. The reason: Foundry has an OEM arrangement with Meru and was viewed as the most-likely acquirer of the WLAN equipment startup. We’re guessing Brocade probably figures it has its hands full with integrating Foundry’s existing business without adding additional pieces. Also, we view the planned Brocade-Foundry pairing as focused primarily on the datacenter, which wouldn’t have much use for WLAN equipment.

The only suitor we can put forward for Meru at this point is Juniper Networks. While Meru’s enterprise focus would fit well with Juniper, we understand the two companies kicked around a deal in 2005, at a reported $150m, but talks didn’t go far. Besides, a Meru source indicated recently that the company is plugging away on an IPO for next year. (We’ve heard that from the company for more than two years , but maybe 2009 will be the year.)

For Meru to go public at a decent valuation, however, it needs both a healthy IPO market and a healthy comparable, Aruba Networks. That company is currently trading at half the level it was at the start of the year, following a blown quarter in February. Aruba will have a chance to make amends in two weeks, as it will report results from its fiscal year on August 28.

Recent WLAN deals

Date Acquirer Target Price
Aug. 2008 HP Colubris Not disclosed
June 2008 Belden Trapeze Networks $133m
July 2008 Motorola AirDefense $85m*
*Estimated      

Source: The 451 M&A KnowledgeBase

Changing channels

Brenon Daly6 Comments

In the hyper-competitive storage market, it seems that one vendor’s pain is another vendor’s gain. We’ve heard from three market sources recently that Dell’s largest-ever acquisition — its $1.4bn purchase of EqualLogic — has hit some difficulties around defections and uncertainties from the SAN vendor’s existing channel partners. Resellers who pushed EqualLogic’s offering in the past are worried about being crushed by Dell’s powerful direct-sales machine, as has happened to some of Dell’s ‘partners’ in the past.

Based on the recent numbers posted by rival SAN vendor Compellent Technologies, there may be something to those concerns. Compellent, which recently signed up its 1,000th customer, said second-quarter sales surged 74% to $21m — which is about what they were for the first two quarters of 2007 combined. (The performance, along with the forecast for profitability for the rest of the year, helped spark a 20% rally in the company’s shares over the past month.) At a recent investment banking technology conference, Compellent CEO Phil Soran told us he’s looking to poach EqualLogic’s channel partners. We’ve heard similar plans coming from rival storage player Lefthand Networks.

How well Dell is able to balance the sales channels for EqualLogic will go a long way toward determining how much of a boost the acquisition will give to its emerging push into storage. Already, the return on EqualLogic is made more challenging by the fact that Dell bought it literally at the top of the market. The day that Dell announced the acquisition, the Nasdaq hit a level it hadn’t seen since early 2001. (The index is currently off 14% since then, after having dropped as much as 23% from its early-November highs.) To make its high-priced acquisition of EqualLogic pay off, Dell is going to have to work hard to keep its new SAN rivals from siphoning off channel sales.

UBS: You buy us?

Brenon Daly

As it reported an ‘unsatisfactory’ loss of hundreds of millions of dollars, UBS AG also said Tuesday that it will carve off its investment banking business. The move represents a retreat from the ‘universal bank’ model the Swiss giant has pursued. And despite management’s statements, it makes a sale of the banking unit more likely. (Just as Time Warner splitting AOL’s legacy Internet access division from its online advertising business clears the way for a sale of the dial-up unit. That is, if there are any AOL subscribers left to sell.)

Washed away by the gallons of red ink spilling from the investment banking department is that UBS actually has a fairly robust advisory business, particularly for transatlantic tech deals. In terms of deal value, it ranked fifth in our recent league tables covering transactions between North America and the EU from mid-2007 to mid-2008. The previous year, UBS placed fourth. (An executive summary of the report is available here; download the full report here.)

Far and away, UBS was the busiest bank, advising on 13 transatlantic transactions over the past year. Both Lehman Brothers and Deutsche Bank advised on eight transactions. And UBS has kept its momentum, already claiming another tombstone since we closed our survey period on June 30. (UBS served as sole adviser for IBM in its purchase of Paris-based ILOG for $340m.) But given how things stand now, the next big deal UBS advises on could be the sale of its own banking business.

Selected UBS-advised transatlantic deals

Date Acquirer Target Price
July 2008 IBM (sole UBS mandate) ILOG $340m
April 2008 Apax Partners TriZetto Group (sole UBS mandate) $1.4bn
Feb. 2008 Reed Elsevier (co-adviser UBS) ChoicePoint $4bn
April 2008 Diodes (sole UBS mandate) Zetex Semiconductors $176m

Source: The 451 M&A KnowledgeBase

Beijing: unsporting laws on M&A

Brenon Daly

The opening of the 2008 Beijing Summer Olympics today has the world’s sporting eyes on China. Of course, global dealmakers had their sights on the large (and growing) Chinese markets long before Beijing landed the Olympics. However, as my colleague Anita Cheung notes, those efforts suffered a setback last week when China passed the latest and strictest set of regulations on foreign investment and M&A in 15 years.

The new regulations give the federal government more control over direct foreign investment and take off the table virtually any acquisition of a Chinese company by a foreign firm. Chinese regulators cite national security and antitrust concerns for these recent actions. This is a distressing development for the idea of a global M&A marketplace. While other countries have certainly used regulation to block ‘sensitive’ acquisitions, few have succeeded with a blanket policy blocking essentially all deals.

In the months before these new regulations took effect, several US media and technology companies were able to ink purchases of Chinese companies. For instance, Hearst Business Media acquired ee365.cn, a technology news website for engineers, last month. Also, CNET acquired Beijing-based 55BBS.com in June, while Google picked up Chinese search engine 265.com one month before. And deals aren’t just being inked by US companies. In June, one of Australia’s largest telecommunications companies, Telstra, picked up a controlling stake in two large Chinese Internet companies, Norstar Media and Autohome/PCPop.

Rather than those transactions being models for future M&A activity in China, we would expect to see more deals break down because of politics. In other words, more deals like February’s aborted $2.2bn leveraged buyout of 3Com, which was led by Bain Capital, with minority participation by Chinese networking equipment vendor Huawei Technologies. In that proposed transaction, US regulators got all worked up over the possible threats to US national security of having partial Chinese ownership of 3Com’s TippingPoint Technologies business. The fear was that the Chinese might be able to spy on the US by using TippingPoint’s intrusion-prevention system to gain access to networks. As silly as that seems, it was enough to sink the deal. And unfortunately, China seems to have adopted that as policy.

Recent foreign deals in China

Date Acquirer Target
July 2, 2008 Hearst Business Media ee365.cn
June 27, 2008 Telstra Norstar Media; Autohome/PCPop
June 17, 2008 CNET 55bbs.com
May 26, 2008 Google 265.com

Source: The 451 M&A KnowledgeBase

What’s brewing at Cisco?

Brenon Daly3 Comments

Although Cisco chief executive John Chambers has thrown cold water on speculation about a large acquisition, the market continues to buzz about possible deals by the networking giant. Observers who think Cisco is big-game hunting point to a number of unusual moves from the company, which – with a bit of reading between the lines – appear to suggest something big is brewing.

For starters, they point to the fact that Cisco has largely stepped out of dealflow, inking just two deals so far in 2008. (We recently noted Cisco’s conspicuous absence, just a day before it announced its $120m purchase of network device configuration vendor Pure Networks.) In comparison, this time last year Cisco had inked nine acquisitions. Additionally, Cisco has drastically scaled back its share repurchase program, perhaps suggesting the company is stockpiling cash for a big deal.

Of course, most of the rumors have concerned a possible pairing of Cisco and EMC, largely so Cisco could get its hands on VMware. (EMC sports a market capitalization of $30bn.) This comes on the heels of earlier rumors that Cisco might be looking at Citrix, largely so it could get its hands on XenSource.

We have a new name to toss into the Cisco M&A rumor mill: McAfee, which has a $6bn market cap. Speculation has recently surfaced that the networking company is eyeing the largest IT security pure play, a combination that would allow Cisco – for the first time – to have control over endpoints. It would pick up a solid portfolio of security products from McAfee, notably encryption and port and device control offerings, as well as potentially salvaging Cisco’s disastrous NAC effort. (And as an added bonus with the deal, Cisco could stick it to Symantec. Cisco has little love for Symantec.)

Whether a deal materializes, or even is being considered, we would expect Cisco to emphasize security much more in the future. It recently handed the division over to Scott Weiss, who came with the January 2007 acquisition of IronPort Systems. A VC who has invested in Weiss’ companies over the years (Weiss also ran Hotmail) said he wouldn’t be surprised if Cisco turned over the entire business to Weiss when Chambers decides to step down.

Try, try again — then liquidate

Brenon Daly

Born from the ashes of a burned-out company, agami Systems may well have landed back in an ash heap. Several reports have indicated the NAS storage specialist wound down operations recently. (We were unable to raise anyone in several calls to their Sunnyvale, California, headquarters.) Just before agami emerged from stealth three years ago, we noted that the company’s core IP – along with a pair of primary VCs and handful of employees – came from NAS startup Zambeel. That company flamed out in 2003, after burning through some $72m in funding. (For its part, agami incinerated about $85m, which included $45m raised earlier this year.)

If indeed agami has gone the way of Zambeel, we highly doubt the sale of agami assets (if that comes) will go the way of Zambeel’s assets. Having lost now on both go-rounds with this technology, Kleiner Perkins Caufield & Byers and New Enterprise Associates probably aren’t interested in stepping in for a third time.

Still, there’s undoubtedly some interesting technology at agami, particularly for block-level vendors that have ambitions for their own NAS products. For instance, Dell, which recently made a significant push into storage, might want to look at agami’s IP. The same is probably true for Compellent Technologies, which has a heap of money from its IPO last year, and for fast-growing LeftHand Networks, a privately held company with some 3,300 customers.

Meanwhile, NetApp, which agami sought to undercut on price, might want to do a ‘buy & bury’ to knock out any future threat. (Keep in mind that NetApp has done graveside deals for NAS technology in the past, buying the patent portfolio of Auspex five years ago during a bankruptcy auction.) In any case, whoever picks up the bits of agami that come up for sale is likely to get a bargain. In fact, we’d be surprised if agami garnered even one-tenth of the $85m that went into it over the past three years.

Selected NAS deals

Date Acquirer Target Price
Sept. 2007 Sun Microsystems Cluster File Systems undisclosed
August 2007 F5 Networks Acopia $210m
Nov. 2003 NetApp Spinnaker $300m
June 2003 NetApp Auspex (patents) $9m

Source: The 451 M&A KnowledgeBase

Big Blue shops across the pond

Brenon Daly

Despite a lingering cold front in transatlantic M&A, IBM recently announced plan to shell out $340m for ILOG. We noted in a mid-year report that spending by North American acquirers of EU-based targets has declined by roughly two-thirds from mid-2007 to mid-2008 compared to mid-2006 to mid-2007. The reason: the slumping dollar and grinding bear market that has cut the value of acquisition currencies for U.S. companies. (Both the greenback and the Nasdaq have lost about 15% of their value over the past year.)

Big Blue’s purchase of the Paris-based vendor of business rules engine technology isn’t likely to signal a rebound in ‘eastbound’ M&A, at least not a significant one. My colleague Adam Phipps notes the IBM-ILOG deal isn’t even among the Top 10 transactions, when ranked by deal size. The proposed combination comes in twelfth place in terms of purchases made by North American companies of EU-based companies over the past year.