Author: Brenon Daly

Courting deals

Brenon Daly

Just how often is legal discovery a form of M&A due diligence? We asked ourselves that question on July 2 when IBM shelled out an undisclosed amount of money for Platform Solutions (PSI) after the two companies had battled each other in the courtroom since late 2006. Big Blue’s initial suit alleged patent infringement, while PSI’s countersuit raised questions of antitrust concerns.

Of course, we would never suggest that Big Blue simply bought off PSI, using its vast cash reserves to quiet a critic. And even if that was IBM’s motivation, we can hardly fault the company for determining that money spent to move its mainframe business ahead through acquisition has a higher potential ROI than just writing checks to lawyers.

With that case closed (as they say in the courtroom), we wonder if a similar scenario will play out at i2 Technologies. As we’ve noted in the past, the supply chain software vendor has run into a heap of problems, prompting it a year ago to hire JPMorgan to advise it on ‘strategic alternatives.’ One of those problems got resolved recently when SAP agreed to fork over $83m to settle a nearly two-year-old patent infringement suit. (To put i2’s legal windfall into perspective, consider that the settlement is twice as much as the company has earned in the past two years combined.) While we initially figured a buyout shop as the likely acquirer for i2, we now wonder if the settlement from SAP is merely a down payment on an acquisition of i2.

Courtroom drama

Parties Legal issue Outcome
IBM-Platform Solutions Patent infringement IBM acquires PSI, undisclosed amount
SAP-i2 Patent infringement SAP pays $83m settlement, all charges dropped

Source: The 451 M&A KnowledgeBase and SEC

M&A for HR

Brenon Daly

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.

M&A cycles in France

Brenon Daly

 Our colleague Matt Aslett recently hit on an incredibly creative and entertaining series of posting on our sister blog CAOS Theory pegged to Euro 2008. He profiled the open source projects and policies in the 16 countries that took part in that soccer (errr, football) tournament. (A Brit, Aslett found himself with a fair amount of free time last month since his country didn’t qualify for the European championships.) Not only did Aslett review all the open source goings-on in the respective countries, he even had them square off against one another, as if they were on the soccer field (errr, football pitch). Eventually, he crowned France this year’s Open Source Champion.

We here at Inorganic Growth are decidedly less creative and industrious than our colleagues over at CAOS Theory. So, with that as back-drop, we try our own entry pegged to a major three-week sporting event in Europe: The Tour de France. The 2170-mile counter-clockwise trip around the country starts on Saturday in wind-swept Brittany. For the first time in 40 years, the Tour opens with a normal road stage rather than a ceremonial prologue. (It’s also the first time in about a decade that the defending champion will not be at the start, as cycling continues its lopsided fight against dopers and other cheats.)

When we punched up the numbers for French M&A in recent years, we have to say we were a bit shocked by how thin the peloton of deals has become recently. In the first half of 2008, we saw just 47 deals involving either French buyers or sellers, with total spending of just $1.2bn. That compares to 62 deals worth $7.8bn in the same period last year and 68 deals worth $18.4bn in the first half of 2006.

With that in mind, we decided not to award a yellow jersey, signifying a clear leader. Instead, we’ll got to the other end of the results and hand out an award for the ‘lanterne rouge’ – the designation for the last-place Tour de France rider. The winner of the ‘anti Yellow Jersey’: Alcatel’s $13.4bn purchase of Lucent. We put this deal, inked in April 2006, on top of the podium because the combination has destroyed more than $22bn of shareholder value in just two years. Felicitations, Alcatel-Lucent.

French deal flow

Period

Deal volume

Deal value

Jan.-June 2006

68

$18.4bn

Jan.-June 2007

62

$7.8bn

Jan.-June 2008

47

$1.2bn

 

Source: The 451 M&A KnowledgeBase

M&A goes MIA in Q2

Brenon Daly1 Comment

With the second quarter wrapped up, we’ve been busy tallying the deal flow from the period. As you might guess, M&A levels for the past three months mirror the dour economic climate. The quick numbers: Overall tech M&A fell 40% in the second quarter, year-over-year, dragged down by private equity players that have been knocked out of the market by the credit market turmoil. The total shopping bill of $148bn is a sharp decline from the $241bn in the same period last year, putting it only slightly above the $122bn recorded in the second quarter of 2006.

A number of trends shaped M&A in the quarter, including the continued use of bear hugs to pressure reluctant sellers, the frozen IPO market and the rise of consolidation deals. Of course, the single largest crimp on deal-making in the second quarter was the utter disappearance of tech buyouts. The value of tech LBOs in the second quarter fell more than 90% compared to the same period last year, when credit was flowing freely. In the just-completed quarter, we recorded some $7bn worth of tech buyouts, down from $85bn in the year-ago period. Looked at another way, LBOs accounted for just 5% of all tech M&A spending in the second quarter, after representing a full one-third of total spending in the same period last year.

Deal flow breakdown

Quarter PE deal value Corp. deal value Total deal value
Q2 2006 $13bn $109bn $122bn
Q2 2007 $85bn $156bn $241bn
Q2 2008 $7bn $141bn $148bn

Source: The 451 M&A KnowledgeBase

Bear market mauls debutants

Brenon Daly

The talking heads at the Nasdaq and the New York Stock Exchange generally define a bear market as a 20% decline from the index’s highs. And, as anyone who picked up a weekend newspaper knows, the markets have officially slumped into bear territory since peaking last fall.

Of course, an index is made up of individual stocks, with some getting more roughed up than others. Oracle has basically traded flat since the Nasdaq meltdown began last October; Microsoft has matched the index’s decline; and VMware has been hammered, plunging nearly three times the Nasdaq decline over the same period. (Another way to look at the meltdown in shares of VMware: At its peak, VMware stock was worth roughly the same amount as a barrel of oil at current prices. Now, you’d have to pony up nearly three shares of VMware to trade for that same barrel of oil.)

With investors not willing to take a chance on shares of existing companies, what chance do the shares of largely unknown and entirely untested IPO candidates have? The short answer is ‘zilch.’ Actually, it’s somewhat of an academic question as there hasn’t been a VC-backed IPO since ArcSight floated on the Nasdaq four months ago. (As we’ve written in the past, we wouldn’t be surprised to see ArcSight get gobbled up, with Hewlett-Packard a logical buyer, in our view.)

With the IPO window closed, corporate acquirers have even more leverage in negotiations. (In other words, don’t expect transactions going off at a double-digit price-to-sales multiple, like IPO candidate EqualLogic got from Dell last November.) We’ve already seen Initiate Systems scrap its proposed offering and go hat-in-hand to a gaggle of investors. Meanwhile, a handful of other S-1s from other companies are gathering dust at the SEC. And we hardly expect any movement during the third quarter. Given the parched IPO market and corporate acquirers in the doldrums, it’s going to be a long, hot summer for a few of these IPO candidates.

Fire-eating Barracuda

Brenon Daly

While not a done deal, Barracuda Networks’ new bid of $8.25 for each share of Sourcefire seems to be closer to the level the market was valuing the Snort shop. Nearly a month ago, the aptly named Barracuda swarmed Sourcefire with an unsolicited bid of $7.50 per share, which worked out to an equity value of $186m for the company. At the time, we called it a ‘floor bid’ – one that the privately held company would likely have to raise. The new offer adds $19m to Sourcefire’s price tag.

That bump appears to be enough for Sourcefire shareholders. (However, the company itself is still holding out for more.) After spending all of the time trading above Barracuda’s initial offer price, Sourcefire shares on Wednesday afternoon were trading in line with the newly raised bid of $8.25. The stock gained 46 cents, or 6%, to $8.11 in mid-afternoon trading.

Since the market has signed off on this deal, we thought we’d note a final curiosity about the proposed transaction: Sourcefire didn’t hire a banker. A company representative said last week that it ‘periodically consults’ with financial advisers but didn’t have any specific bank retained. (We contacted the company again on Wednesday for an update, but we didn’t hear back.)

Sourcefire is actually the second company targeted in an unsolicited offer that is going it alone. Mentor Graphics also told us it didn’t have a banker to help it fight off the ‘bear hug’ from Cadence Design Systems last week. And it wasn’t like the bid was just sprung on Mentor. The two companies had been talking since April, with Cadence advised by Deutsche Bank Securities. However, a representative said it was planning to hire one. (If history is any guide, Mentor will likely be calling Goldman Sachs, given that bank’s legacy of work for companies on the defensive.) Just add the lack of mandates to the growing list of problems for bankers, at least for those who haven’t already been laid off in the recent downturn.

National (in)security

Brenon Daly

With Sourcefire likely to get gobbled up shortly by a hungry Barracuda Networks, we couldn’t help but flashback to the earlier attempt by Check Point Software Technologies to acquire the Snort vendor. (For those of you keeping score at home: Yes, Check Point’s offer more than two years ago valued Sourcefire higher than Barracuda’s current bid.) We mention the stillborn deal because there are echoes of Check Point-Sourcefire in a current proposed pairing.

Recall that the deal got snagged because of US regulators’ concern about ‘sensitive’ technology (Sourcefire’s Snort intrusion prevention technology) falling into the hands of foreign companies (Check Point’s Israeli ownership). That concern – an overblown bit of nutty protectionism that doesn’t exist anywhere outside of Washington DC – is back at issue in the proposed pairing of Oregon-based identification card maker Digimarc and a French defense firm called Safran.

Earlier this week, Safran offered $300m in cash for Digimarc, hoping to trump a three-month-old agreement Digimarc had with US company L-1 Identity Solutions. (We looked at the deal, which represented a five-bagger for Digimarc, back in March.) L-1’s offer, which is half in stock and half in cash, is roughly worth $260m.

On word that Safran is now in the running, L-1 played the national security card, warning about the sinister threat posed by a French firm owning Digimarc’s ID card business. Safran’s bid would face scrutiny from the same regulatory agency that spiked Check Point’s planned purchase of Sourcefire, the Committee on Foreign Investment in the US. We think such regulatory meddling is misguided. But we certainly understand L-1’s move to wrap themselves in the flag to secure this deal. It’s a lot cheaper for them to hire a few well-connected lobbyists than actually raise their bid.

Less than zero?

Brenon Daly

The company once known as MathSoft has been cancelled out by the following equation: 1 – 0.5 – 0.5 = 0. The firm made its first subtraction in early 2001, with the divestiture of its core technical calculations software business. That was followed up last week with the sale of the remaining chunk of the company – which sold data analysis software under the name Insightful Corp – to Tibco for $25m. (Along the way, Insightful further whittled off a small sliver of its business, some search assets it sold to Hypertext Solutions, which now does business as Evri, for $3.7m last year.)

If the name MathSoft seems only vaguely familiar, it’s because the old-line firm hasn’t existed for seven years, at least not under its original name and original business. Founded in 1984, the Massachusetts-based company emerged as MathSoft two years later. And while it’s too soon to say whether Tibco’s tiny purchase of Insightful will pay dividends, the former had better hope the acquisition goes smoother than the last one involving Insightful’s CEO. Before running Insightful, Jeff Coombs headed up marketing at Acta Technology – a startup selling ETL technology that was snapped up by Business Objects in mid-2002 for $65m.

Actually, that deal ended up costing Business Objects a fair bit more, in both money and time. The reason? Just a week after the deal was inked, ETL powerhouse Informatica filed a patent infringement case against Acta. That worked its way through the courts for the following four and a half years, until a jury decided a year ago to award Informatica $25m in damages. Tibco, too, has had courtroom headaches from one of its deals, picking up a company that was later sued in the widespread lawsuit over share allocations of IPOs in the bubble era. So both the buyer and seller in this deal have firsthand experience with negative additions through acquisitions. 

Subtraction from MathSoft

Date Event Price
Jan. 2001 Divestiture of core education products division $7m
August 2007 Surviving company Insightful sells search assets $3.7m
June 2008 Insightful sells to Tibco $25m

Source: The 451 M&A KnowledgeBase

VeriSign’s yo-yo diet

Brenon Daly

We’ve noted several times in the past that former binge eater VeriSign has set itself on a fairly severe corporate diet. (Last November, we outlined VeriSign’s divestiture plan that could trim up to one-third of the company’s revenue.) Having already sold off three businesses so far in 2008, VeriSign is nearing a fourth divestiture, we hear.

At the America’s Growth Capital security conference in early April, we heard hallway chatter that VeriSign was deep into talks with a networking equipment vendor and a services shop about selling its managed security service provider (MSSP) business. Now, a source indicates that VeriSign has a letter of intent signed to shed its MSSP business. The acquirer isn’t immediately known, but we hear it’s a strategic, rather than financial, buyer. Given the recent moves by telcos to buy security service shops – for instance, Verizon Business’ purchase of Cybertrust a year ago and BT Group’s acquisition of Counterpane Internet Security in October 2006 – we could also imagine a phone company adding the MSSP business to its service offering.

Like any divorce, a divestiture tends to take longer and be more expensive than any of the parties imagined at the start. And we can only guess at the discount for VeriSign’s MSSP business. The divestiture would effectively unwind its $140m cash-and-stock acquisition of Guardent in December 2003. Ironically, VeriSign inked the Guardent purchase at a time when it was also dieting, having shed its domain name-registry business and other assets. Is this the corporate equivalent of yo-yo dieting? 

Coming and going at VeriSign

Year Acquisitions Divestitures
YTD 2008 0 3
2007 0 1
2006 8 1
2005 7 1

Source: The 451 M&A KnowledgeBase

Lessons from a big Yahoo

Brenon Daly

Talk about being thrown straight into the shark tank (or more accurately a barracuda tank): John Burris has agreed to step from the board to the CEO spot at Sourcefire. The appointment comes just two weeks after Barracuda Networks made an unsolicited offer for the network security vendor. We noted that the low-ball bid of $7.50 per share from Barracuda – an aggressive company that lives up to its name – will likely set the ‘floor price’ for any sale of Sourcefire. (Since the bared-teeth bid was revealed, Sourcefire’s long-suffering shares have closed above the offer price in every trading session, finishing Wednesday at $7.92. The $0.42 difference equates to about a $10m gulf between what the market says Sourcefire is worth and what Barracuda says the company is worth.)

The fact that Sourcefire – which had been looking for a chief executive replacement since February – stayed in-house to fill the top spot makes us wonder if the company hasn’t resigned itself to a sale. Don’t forget that Sourcefire was supposed to be sold to Check Point Software Technologies more than two years ago – at a higher price than its current valuation, no less. And although we are far from experts in employment contracts, we saw nothing in Burris’ agreement that would make an acquisition of Sourcefire prohibitively expensive. Certainly nothing like the employee severance plan at Yahoo, which is effectively a poison pill.

Indeed, Burris may well look at the tenure of Yahoo’s Jerry Yang during Microsoft’s unsolicited approach to the search engine as a quick executive lesson in how not to handle M&A. On the no-no list: refusing to talk to a suitor, erecting all sorts of obstacles to consolidation and, above all, continuing to insist that you know best in creating value at a company – even when all evidence points to the contrary. “I bleed purple,” Yang said at one point, using Yahoo’s signature color to demonstrate his closeness to the company he helped found. Yang may see it that way, but Carl Icahn and other Yahoo shareholders don’t particularly care. They’re very clear that blood is red, just as money is green. We think Burris – whose connection to Sourcefire only dates back to March and who previously headed up sales at Citrix Systems – won’t suffer a similar case of color blindness.