Author: Brenon Daly

Creative destruction and its discontents

Brenon Daly

In a February 2007 report, we asked an egghead question about valuations in a sector that had been ‘creatively destroyed,’ to borrow Joseph Schumpeter’s oft-used phrase. At the time, we weren’t asking for purely academic reasons. Rather, we were trying to put a price on Tumbleweed Communications following Cisco’s purchase of rival anti-spam appliance vendor IronPort Systems. (Rumors had private equity firms looking at Tumbleweed.)

It turns out we weren’t far off in our valuation. We slapped a $150m price tag on Tumbleweed; last Friday, French IT consulting firm Sopra Group said it would pay $138m in cash for the company. The deal is expected to close in the third quarter. While the companies see a bright future for the combination, we have some reservations. Specifically, we wonder how Sopra, which is making the acquisition through its Axway subsidiary, will hit its target of 12-15% operating margins for the combined company next year. (Tumbleweed has run at negative operating margins for years, piling up an accumulated deficit of $300m in its history.)

Whatever the performance of Tumbleweed under its new owners, we have to say that Sopra certainly didn’t overpay for the company, which should double its sales here in North America. At just two times trailing sales, Tumbleweed was valued at less than half the price-to-sales multiple found in comparable transactions.

Anti-spam shopping

Acquirer Target Date Price Target TTM sales
Sopra/Axway Tumbleweed June 2008 $138m $58m
Google Postini July 2007 $625m $70m*
Cisco IronPort Jan. 2007 $830m $100m
Secure Computing CipherTrust July 2006 $264m $48m
Symantec Brightmail May 2004 $370m $26m

*estimated, Source: The 451 M&A KnowledgeBase

Deal-making in a desert

Brenon Daly

Exactly a year ago, SonicWall handed over $25m in cash for Aventail. The deal looked like a ‘last-gasp’ transaction in a number of ways, not the least of which was that Aventail’s purchase price was less than one-quarter of the venture funding the company had raised over the years. Beyond the money-in/money-out gulf at Aventail, we would note that in the year that has passed, not a single significant SSL VPN deal has been reached.

Since the big-name consolidation in this market began in mid-2003, most of the large security acquirers have gone shopping here. SSL VPN deal flow hit its high point early on, with NetScreen shelling out $265m, mostly in stock, for Neoteris. (A half-year later, Juniper Networks threw $4bn in stock at NetScreen, in a deal that Juniper has yet to recognize much of a return on.) Other tech giants quickly inked deals of their own, including Cisco, Citrix and Microsoft.

In contrast, the handful of companies that have acquired SSL VPN technology since mid-2007 have been tiny outfits, with a number of consulting shops doing the buying. That hardly suggests top-dollar acquisitions. The SSL VPN vendors that missed out when the big buyers came through the market may need to scale back their exit expectations. We would drop PortWise and Array Networks, among others, into that bucket. 

Significant SSL VPN deals

Acquirer Target Date Price
F5 Networks uRoam July 2003 $25m
NetScreen Neoteris Oct. 2003 $265m
Cisco Twingo March 2004 $5m
Citrix Net6 Nov. 2004 $50m
Microsoft Whale Communications May 2006 $75m*
SonicWall Aventail June 2007 $25m

*estimated, Source: The 451 M&A KnowledgeBase

Come on, Google, buy Salesforce.com already

Brenon Daly

Companies looking to get into new markets typically run the clichéd ‘buy, build or partner’ calculus on how to get the highest return on the lowest investment. Invariably, the answer is ‘yes’ to all of the options, as significant strategic moves require broad efforts to take the company in new directions.

Consider the case of Google and its still-emerging Apps business. (Like so much at the search engine company, there seems to be a ‘beta’ tag hanging on this division.) It has inked three deals for both technology and a sales channel, unleashed hundreds of engineers on the would-be ‘Office killer’ and, just recently, put together a distribution deal with Salesforce.com.

And yet, Apps still isn’t where Google needs it to be. Even more of a concern is that, in our opinion, the moves aren’t even enough to get Google Apps in a position to begin to challenge Microsoft Office. Google needs something more. In the end, a successful partnership isn’t simply about access. It’s about efficacy. In order for Google to control the Salesforce.com distribution channel, it has to control Salesforce.com. Read full report.

Barracuda bares its teeth

Brenon Daly

Never known as a shy or retiring competitor, Barracuda Networks has lobbed an unsolicited bid to acquire Sourcefire for $7.50 per share in cash. (Full report.) That works out to a slight 13% premium on Sourcefire’s closing price ahead of the bid, and essentially where the shares began 2008.

We look at Barracuda’s bid as setting a ‘floor price’ for Sourcefire. It is certainly an opportunistic offer, as Sourcefire has been burned on Wall Street. (The company didn’t help itself when it came up short of investors’ expectations in its first quarter as a public company a year ago.) To get this deal closed, however, we suspect Barracuda will have to raise its bid. Investors have already pushed Sourcefire shares above the offer price.

To push this deal along, Barracuda can draw on the experience of one of its two outside backers, Francisco Partners. The buyout shop took IT security appliance vendor WatchGuard Technologies private in July 2006 after a protracted and bitter campaign.

Learning Tree seeds sale

Brenon Daly

After more than 30 years in business, Learning Tree International has slapped a ‘for sale’ sign on itself. The IT training shop has retained RBC Capital Markets to guide the process, which comes as the company has only partly worked through a turnaround. It suffered through several years of stagnant revenue and negative operating margins, when the Internet bubble burst and companies cut back sharply on their IT staff members, which, at the time, were Learning Tree’s only customers. (The company has since expanded into management training as well.)

The timing of the possible sale is curious. Learning Tree has come up short of Wall Street estimates for two straight quarters, leaving the company’s stock below where it started the year. (Even with the bounce on May 28 from investors betting on an acquisition, Learning Tree shares have dropped nearly one-quarter of their value in 2008.) Learning Tree currently sports a market capitalization of about $290m, but holds $57m in cash and no debt, lowering its enterprise value to $233m. The company will likely record about $190m in sales in the current fiscal year.

Given the current valuation, maybe some of the executives should take a Learning Tree course on maximizing shareholder value. Of course, the top two executives have a distinct interest in maximizing shareholder value, given that they own nearly half of the company’s 16.6 million shares. Learning Tree cofounders David Collins and Eric Garen own 25.6% and 20.4% of the company, respectively. And if that weren’t motivation enough, we couldn’t help but notice a kicker that could put even more money into the executives’ pockets: The company approved a bonus of one year’s worth of salary for executive officers if Learning Tree gets sold before the end of next March. So, the sellers are ready, but where are the buyers?

An Oak accord

Brenon Daly

Oak Investment Partners has finally helped broker a marriage for portfolio company Talisma – a full half-decade after the startup stumbled on its way down the aisle. In both cases, however, it isn’t exactly clear whether the investment firm should be sitting on the bride’s side or the groom’s side at the wedding. In fact, Oak would have a seat on both sides of the aisle.

In this go-round for Talisma, Oak’s late-March investment of $50m in nGenera helped the SaaS rollup add Talisma to its portfolio. If the strategy sounds familiar, it’s because Oak, which owns a majority of Talisma, had a nearly identical plan for the CRM vendor in late 2003. In that case, Oak wanted to stitch together Talisma with fellow portfolio company Pivotal Corp, in a deal that valued publicly traded Pivotal at $48m. Just as that deal was heading toward a vote, however, two other companies outbid Oak for Pivotal. (First, it was Onyx Software, then it was CDC Software. Of course, those companies would go at it again three years later when CDC tried to spoil the purchase of Onyx by Consona, which was then known as M2M Holdings.)

What exactly Oak plans to do with its newly enlarged portfolio company, nGenera, is anyone’s guess. However, it could do a lot worse than follow the strategy of Consona, which was taken private by Battery Ventures. Since the LBO, we understand Battery has pulled out something like six times its money from the CRM rollup, which is still rolling along. Maybe nGenera will serve as Oak’s enterprise SaaS rollup. The company has already done six deals – and counting. 

nGenera’s (fka BSG Alliance) acquisitive history

Announced Target Deal value Target description
May 21, 2008 Talisma Not disclosed SaaS customer service automation
March 5, 2008 Iconixx Not disclosed On-demand talent management HR software
Oct. 3, 2007 Industrial Science Not disclosed Business simulation software
Nov. 29, 2007 New Paradigm Not disclosed Research company
Sept. 13, 2007 Kalivo Not disclosed On-demand collaboration provider
May 7, 2007 The Concours Group Not disclosed Research and executive education firm

Saving on services at HP

Brenon Daly

Like so much at Hewlett-Packard these days, CEO Mark Hurd seems to be succeeding where his predecessor, Carly Fiorina, failed. In this case, Hurd is set to buy outsourcing giant EDS in a $13.9bn deal. While Wall Street roughed up HP a bit, there wasn’t anywhere near the outcry that hit Fiorina when she tried to pull off her multibillion-dollar services deal in late 2000. Following the hammering from investors, Fiorina relented and backed away from her plan to pick up the consulting business at PricewaterhouseCoopers after just two months. (Of course, IBM ended up getting a bargain two years later on the PwC unit, paying $3.5bn for it in 2002. That was just one-fifth the amount HP was set to hand over.)

The goal of the moves by Fiorina and Hurd is the same: build up the services arm of the hardware-oriented company. (With 2007 revenue of $22bn, EDS would more than double the size of HP’s services business.) Hurd has already used that strategy in the company’s software portfolio, shelling out $4.5bn for Mercury Interactive to effectively double the size of that division. Of course, we suspect the support Hurd is enjoying for his planned acquisition has more to do with fiscal reasons than strategic ones. Paying less than 1x sales for EDS is a very ‘un-Fiorina’-like valuation. 

Rival moves in services

Acquirer Target Announced Deal value Target TTM sales
IBM PwC (consulting arm) July 30, 2002 $3.5bn (adjusted to $3.9bn) $4.9bn
HP EDS May 13, 2008 $13.9bn $22bn

Evercore’s short cycle

Brenon Daly

Investment banking, as everyone knows, is a cyclical business. In the case of Evercore Partners, the downswing lasted about a day. On Monday morning, CEO Roger Altman was on a call with disenchanted investors trying to explain why the company booked just half the amount of revenue in the first three months of this year that it did in the same period last year. (Setting aside the utter ridiculousness of projecting quarterly revenue on an advisory business, Evercore’s first-quarter revenue of $45m came in about one-third below the amount Wall Street had projected.) On the report, Evercore shares sank to their lowest level since the boutique bank came public almost two years ago.

By Monday afternoon, however, it was looking like Evercore was set to pocket tens of millions of dollars for the bank’s role in co-advising EDS on its $13.9bn sale to Hewlett-Packard. Depending on how Evercore and Citigroup divvy up the advisory fee, Evercore could end up taking home more money from its EDS mandate than it booked in the first three months of the year. (HP’s purchase is expected to close in the second half of 2008, so the success fees will flow after that.) We guess that’s what Altman, who worked firsthand on the EDS sale, meant when he said the bank’s backlog was ‘fine.’ Evercore shares, however, haven’t recovered and, in fact, are changing hands below where they were on Monday.  

Banking HP-EDS

Company Advisers
HP JPMorgan, Lehman Brothers
EDS Citigroup, Evercore Partners

Netezza nibbles

Brenon Daly

A few months after indicating it was ready to buy its way into analytics, Netezza has inked its first deal as part of the initiative. The company said last Thursday that it will pay $6.4m for NuTech Solutions. It’s largely an HR move, with Netezza picking up 30 scientists and engineers from the startup. The addition should help Netezza as it looks to run different types of complex analytics inside Netezza Performance Server, rather than just enlist help from partners – including vendors, academic institutions, developers and consultancies – through its existing Netezza Developer Network.

Rival data-warehousing vendors are also looking to add more smarts to their boxes. So far, however, that hasn’t meant much shopping. For instance, Teradata and SAS Institute cozied up and unveiled a joint roadmap last October involving integrating various SAS wares, including its analytics and data-mining algorithms, into the Teradata database. (Netezza also has partnerships with SAS and rival predictive analytics vendor SPSS.) Meanwhile, Greenplum also announced support for embedded analytics in the latest release of its warehouse, G3.

We wonder if the NuTech deal – Netezza’s first acquisition – is a bit of an appetizer ahead of a larger bite of the analytics market. We’ve highlighted a couple of tasty targets for Netezza, including existing partner Manthan Systems, which focuses solely on the retail industry, or KXEN, which would fit well with Netezza’s mission to expand the scope of its query technology. With its treasury stuffed with cash from its recent IPO, Netezza certainly has the resources to do the deals.  

Selected data warehousing-analytics transactions

Acquirer Target Announced Deal value
Teradata DecisionPoint Software Nov. 2005 Not disclosed
IBM Alphablox July 2004 $37m*
Netezza NuTech Solutions May 2008 $6.4m

Will Larry buy Switzerland?

Brenon Daly

Informatica’s acquisition of Identity Systems, which closed last Thursday, brought the data integration specialist even closer to Oracle. The two companies have had an odd relationship, with Informatica competing against the behemoth virtually since it opened its doors some 15 years ago. (Despite the fact that Oracle gives away its bare-bones Warehouse Builder, Informatica has been able to build up a business that rang up nearly $400m in sales last year, having grown revenue more than 20% for three straight years.)

Through its non-stop acquisitions, Oracle actually OEMs three bits of technology from Informatica, including the just-acquired Identity Systems. Mantas – an anti-money-laundering vendor acquired by Oracle’s i-flex solutions – includes the identity resolution technology from Identity Systems. (Informatica had older OEM arrangements with Hyperion Solutions and Siebel Systems, both of which were gobbled up by Oracle.)

Recently, rumors have been picking up that Oracle may be looking to own Informatica outright. Making such a move would dramatically strengthen Oracle’s data-quality offering, as well as beef up its semi-structured and unstructured data integration story. (Those are areas where IBM has a pretty solid portfolio.) Oracle has already made a small acquisition in this market, spending an estimated $45m on Sunopsis in October 2006. But it still trails the business that rival IBM has acquired through its purchases of Ascential Software and DataMirror.

Of course, one of Informatica’s main selling points is that it’s a neutral party and doesn’t push other applications. That pitch has resonated with customers. Last year, Informatica posted license revenue growth of 20%. Of course, that neutrality would be gone if Oracle gobbled up Informatica. However, Ellison and the rest of the sharp-penciled M&A group at Oracle are realists at the bottom line. Financially, it may be worthwhile for them to give up several hundred of Informatica’s 3,000 customers as a way to protect a database revenue stream. 

Selected data integration deals

Acquirer Target Announced Deal value
IBM Ascential March 2005 $1.1bn
IBM DataMirror July 2007 $162m
Oracle Sunopsis Oct. 2006 $45m*