Author: Brenon Daly

A chippy deal

Brenon Daly

After more than two months of discussions, Cadence Design Systems put a bear hug on Mentor Graphics on Tuesday, June 17, offering roughly $1.6bn in cash for the smaller chip-design vendor. Under terms of the unsolicited offer, Cadence would pay $16 for each of the roughly 91 million Cadence shares. Cadence said it would cover roughly one-third of the purchase with its available cash, while borrowing an additional $1.1bn. Deutsche Bank Securities is advising Cadence.

The deal – if it gets approved by Mentor shareholders and survives regulatory review – would combine two of the three largest electronic design automation (EDA) companies. Cadence and rival Synopsys are roughly the same size at about $1.6bn in sales last year, which is twice as big as Mentor. (Various pairings of these three players have been discussed over the years.) However, Mentor said later Tuesday that it was not interested in a pairing with Cadence.

Cadence’s approach, which we would characterize as ‘opportunistic consolidation,’ continues a recent trend toward unsolicited offers for underperforming rivals made in a very public way. (Although Mentor has recently trimmed its rather bloated cost structure, the company’s operating margins are less than half the level at Cadence.) The outcome of these ‘bear hugs’ has spanned the possibilities: Iomega recently accepted a raised offer from EMC; Microsoft walked away from its unsolicited bid for Yahoo; and Electronic Arts took its bid for Take-Two Interactive hostile.

EDA deal flow, by year

Year Deal volume Deal value
2005 5 $298m
2006 6 $888m
2007 13 $225m
YTD 2008* 11 $2.7bn

*includes announced Cadence-Mentor transaction. Source: The 451 M&A KnowledgeBase

Emerald Isle M&A

Brenon Daly

Given that today is Bloomsday, we’ve given ourselves literary license to take a look at deal flow between the US and Ireland. (Don’t worry, if you’re like us and have never actually managed to get through James Joyce’s ‘Ulysses’ – despite taking more than a few cracks at the tome – this Insight will still make sense. Quick show of hands: Who’s actually read all the way to “…and yes I said yes I will Yes”?)

In any case, deal-flow between the two countries has been remarkably stable during the past four years, clipping along at about 30 deals each year. M&A spending in the most-recent year, however, has fallen to its lowest level, just half the previous year and one-quarter the level in the year before that. (Note: In three weeks, we’ll publish our annual Trans-Atlantic Tech M&A Banking Review. Obviously, the steady decline of the US dollar has had a big influence in deal-making. So far, we’ve seen European acquirers be even more active than the previous year, while US buyers have only spent about half as much as the same period last year. You can request a copy of last year’s report here.)

One company that may very well figure into the US-Ireland M&A tally very shortly is Iona Technologies. We noted in February that the Dublin-based company had attracted an unsolicited bid from an unknown company, which turned out to be Germany’s Software AG. Iona has retained Lehman Brothers, which led its IPO in the late-1990s, to advise it. At the time, we tapped SAP and Sun Microsystems as the most-logical buyers of Iona. More recently, an Irish newspaper reported that Progress Software or Red Hat is Iona’s ‘preferred’ buyer. Meantime, Software AG now says it’s out of the running. So it looks like we could very well be seeing an American company pick up another piece of the Old Sod. 

Irish-US M&A (year ending each Bloomsday)

Period Deal volume Deal value
June 16 2004-05 28 $1.2bn
June 16 2005-06 29 $3.8bn
June 16 2006-07 36 $1bn
June 16 2007-08 33 $860m

Source: The 451 M&A KnowledgeBase

Blank printing presses

Brenon Daly

Gutted by the arrival of Internet, newspaper companies have nonetheless printed very few transactions that could help them survive in the Media 2.0 era. One reason for the blank M&A pages: The currencies available to them are disappearing, according to Tim Connors, a partner at U.S. Venture Partners. Speaking on a panel at the recent IBF VC Investing Conference in San Francisco, Connors said the virtually uninterrupted slide in shares of many media company have taken a few would-be acquirers out of the market.

Indeed, we can only imagine it’s probably inconceivable for any of the newspaper companies to be shopping, at least not for an equity deal. Regional newspaper company McGannett shares are currently trading at their lowest level ever; USA Today-owner Gannett stock has sunk to a 14-year low and shares in the venerable New York Times are changing hands at levels not seen since mid-1996.

At the IBF conference, Connors noted USVP recently had an exit to an old media company. Portfolio company Adify, which runs advertising networks for some 120 vertically focused Web sites, got snapped up by Cox Enterprises for $300m. (Adify was in the midst of raising a third round of funding when Cox took them out. JP Morgan banked the deal after one of their analysts initially suggesting the two companies might strike a commercial relationship.) Incidentally, Cox paid its $300m bill for Adify in cash. 

Buyout blues

Brenon Daly

Three years ago, the buyout barons shook up the technology M&A market with the $11.3bn LBO of services giant SunGard. At the time it was the largest tech buyout, equaling basically half the money spent on all LBOs in the previous year. Even as financial acquirers became more active – increasingly their spending sevenfold from 2004-07 – the SunGard buyout stood as the third-largest tech LBO.

SunGard’s brozen-medal placing seemed unlikely to hold at this time last year. There seemed to be a new multibillion-dollar LBO every week, with the targets getting bigger in every transaction. (Remember the half-serious speculation that Microsoft could be taken private?) All that changed in late summer, when debt became more expensive, sending the LBO market into a funk from which it hasn’t recovered. So far this year, LBO firms have announced 49 deals worth $10.3bn, down from 59 deals worth $97bn in the same period last year, according to The 451 Group’s M&A KnowledgeBase.

The change in climate isn’t lost on the financial deal-makers. Underscoring the difficulties in the current credit market, SilverLake’s Alan Austin said at the recent IBF VC Investing Conference in San Francisco that his firm couldn’t pull off a deal like SunGard right now. The buyout firm put in $3bn of equity and borrowed the remaining $8bn. ‘We could never do something like that today – never mind the terms (of the debt)’, Austin said at the conference.

PE deal flow

Period Deal volume Deal value
Jan. – June 2008 51 $11bn
Jan. – June 2007 59 $97bn
Jan. – June 2006  35  $17bn
Jan. – June 2005 25 $24bn

Source: The 451 M&A KnowledgeBase

Captive deal

Brenon Daly1 Comment

For many startups, the deeper a partnership is, the shallower the pool of potential acquirers. Consider the case of SwapDrive and this week’s quiet sale to Symantec. The two sides inked an OEM agreement nearly two years ago – a bit of paperwork that turned out to be a precursor to an M&A contract. With Symantec likely accounting for a majority of sales at SwapDrive, a trade sale seemed the realistic exit for SwapDrive. That became even more likely as sales of Norton 360, which is based on the technology supplied by SwapDrive, outstripped Symantec’s early projections, according to our understanding. The Norton 360/SwapDrive offering targets the consumer market, which complements the company’s enterprise-focused Symantec Protection Network.

However, perhaps because it was essentially a captive deal, SwapDrive ended up getting taken out at a significant discount to its rival Berkeley Data Systems. Just half a year ago EMC shelled out $76m for Berkeley Data, which runs the Mozy service. We understand Mozy generated about $8m in sales in the year leading up to the sale, meaning EMC paid 9.5 times sales for the online backup startup. In contrast, SwapDrive went for 5.6 times trailing sales. According to reports, Symantec paid $123m for SwapDrive, which was running at $22m.

Symantec’s purchase of SwapDrive continues a run of larger storage players snagging online backup vendors. The earlier deals – inked by Iron Mountain and Seagate Technology – got done at multiples closer to Symantec-SwapDrive, although the market has heated up a bit since those first combinations. We wonder what that will mean for the last remaining online backup vendor of note: Carbonite Inc. The company took in $20m in its series B in February and has indicated it’s looking for an IPO late next year. Who knows, maybe the window will be open by then. 

Selected online backup deals

Acquirer Target Date Price Target revenue
Symantec SwapDrive June 2008 $123m* $22m*
EMC Berkeley Data Systems [Mozy] Oct. 2007 $76m* $8m*
Seagate EVault Dec. 2006 $185m $35m*
Iron Mountain LiveVault Dec. 2005 $42m $10m

*estimated, Source: The 451 M&A KnowledgeBase

How do you say ‘Tumbleweed’ in French?

Brenon Daly

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

Brenon Daly

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

Date Target Price
May 29, 2008 Kintera $46m
Aug. 6, 2007 eTapestry $25m
Jan. 16, 2007 Target Software $60m

Source: The 451 M&A KnowledgeBase

NetQoS: a small buy on the way to a sale

Brenon Daly2 Comments

On its way to a probable public offering next year, NetQoS has acquired a startup that will boost the company’s offering to the financial services industry. On Tuesday, NetQoS said it’ll pay a small amount of cash for Helium Systems, which makes trade monitoring software. (Helium isn’t expected to add much revenue to NetQos, which has been tracking to $60m this year, up from $45m in 2007.)

Indeed, organic growth has been the story at NetQoS, since the Helium acquisition is the first by the company in nearly two-and-a-half years. But the pace may be about to pick up. The reason? As it gets ready to put together an underwriting ticket for an IPO down the road, NetQoS has found (surprise, surprise) that bankers are also pitching other deals. Meanwhile, for its part, the company has started to look at ways to fill up its corporate coffers if it finds a deal that’s too good to pass up.

Thus far, NetQoS has been remarkably conservative in its capitalization, raising just $21m total. (Liberty Partners, a New York PE firm that typically invests in midmarket companies, is the majority owner of NetQoS and the company’s only institutional investor.) NetQoS, which has been cash-flow positive since 2005, hasn’t taken any outside money in a half-decade. But with an IPO payday likely in 2009, we’re guessing NetQoS wouldn’t have any trouble lining up funds, either from its current backer or even a new partner. 

NetQoS acquisitions

Date Target Rationale
June 2008 Helium Systems Trade monitoring
Dec. 2005 Pine Mountain Group Services
April 2005 RedPoint Network Systems Device management

Source: The 451 M&A KnowledgeBase

Taking stock

Brenon Daly

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

Date Acquirer Target Amount of cash
May 2007 Thomson Reuters $17.2bn
Jan. 2008 Oracle BEA Systems $8.5bn
Oct. 2007 Nokia Navteq $8.1bn
Oct. 2007 SAP Business Objects $6.8bn
May 2007 Microsoft aQuantive $6.4bn
Nov. 2007 IBM Cognos $5bn

Source: The 451 M&A KnowledgeBase

Wire buys wireless

Brenon Daly

Two weeks ago, we noted Trapeze Networks had been sold without indicating what company had been sitting across the table from the wireless LAN (WLAN) infrastructure vendor. The buyer can now be named: Belden. The St. Louis-based company is more known for its wiring and cable products. (Indeed, before inking the Trapeze deal, Belden’s previous deal had been the $195m purchase of a Hong Kong cable company.) We’ll have a full report on this transaction – and the implications for the sector – in tonight’s Daily 451.

While the pairing of a wireless company with a company known for its wires may seem odd, there are actually a fair number of points that make sense for Belden-Trapeze. For starters, Belden is viewed in the WLAN market as a neutral vendor, which means that Trapeze’s sales arrangements shouldn’t be threatened by the acquisition. We would contrast that with the fallout from Cisco’s early 2005 purchase of Airespace, which forced Airespace partners Alcatel and Nortel Networks to scramble to find a replacement supplier of WLAN technology after the deal. Also, Trapeze had decent sales in Europe and Asia, markets that Belden has targeted.

In the end, however, it all comes back to money. In that sense, the Trapeze deal shows how steeply the valuations of the WLAN infrastructure vendors have come down. The multiple in this deal was two-thirds lower than the level that Cisco paid three years ago in its purchase to get into this market. (Granted, Cisco has a reputation of skewing the market with top-dollar bids.) Still, Trapeze exited for $133m after raising about $100m in venture funding. We understand that rival Meru Networks is currently out raising another round. The company already counts Lehman Brothers, Clearstone Venture Partners, Sierra Ventures and DE Shaw among its investors. While Meru may well land an up round, we’re guessing Trapeze’s valuation – combined with Aruba Networks’ rough ride on the Nasdaq – certainly haven’t helped those conversations. 

WLAN vendor valuations

Company Acquirer Price Price-to-TTM sales ratio
Airespace Cisco $450m 7.5x*  
Trapeze Belden $133m 2.3x  
Aruba NA $467m market cap 2.7x  

*estimated, Source: The 451 M&A KnowledgeBase