Author: Brenon Daly

Europe: Not the lost continent

Brenon Daly

Contact: Brenon Daly

Even as Europe appears increasingly likely to splinter under the weight of its unsustainable debt loads, there’s still a fair amount of shopping on the Continent. In fact, the $68bn worth of transatlantic transactions so far this year is the highest level in four years and equal to the combined value of European deals done over the previous two years. (To be clear, we’re talking about transactions where either the buyer or seller is headquartered in a western European country.)

Rather surprisingly, four of the 10 largest deals announced so far in 2011 have European accents. In three cases, the sellers were based in Europe (Autonomy Corp, Skype, Kabel BW) while SAP comes in as the sole big buyer, thanks to last week’s $3.65bn purchase of SuccessFactors. Even more surprisingly, two of those mammoth transactions have been announced since the debt crisis really took hold on the Continent.

If European leaders can move to stabilize the region – granted, that’s a big ‘if’ – then tech acquisitions should accelerate from their already high rate, at least according to the view of some dealmakers. Fully two-thirds of the more than 100 corporate development executives we surveyed over the past week said M&A activity will increase if Europe shows progress in ‘resolving or containing’ its debt crisis.

Recent Blue Coat shareholders no longer in the red

Brenon Daly

Contact: Brenon Daly

Anyone who bought shares of Blue Coat Systems over the past half-year breathed a sigh of relief after the recent buyout of the old-line security vendor. Thoma Bravo’s bid of $25.81 for each share means that buyers since May are all above water. (The offer represents a 48% premium over the previous close and is almost twice the price that Blue Coat stock fetched on its own back in August.)

But there’s another longtime shareholder that’s probably plenty relieved as well: Francisco Partners. Recall that the buyout firm, which had previously invested in the company, also loaned Blue Coat $80m to help it pay for its purchase of Packeteer in 2008. Francisco took convertible notes, which came at an exercise price of $20.76. Although that was roughly where the stock was trading in the spring of 2008, it finished out the year in the single digits as the recession deepened.

More recently, Blue Coat had been trading below the exercise price for the past four months, hurt by three consecutive revenue shortfalls and turnover in the chief executive office. But with Thoma Bravo’s take-private, which is slated to close in the first quarter of 2012, Francisco Partners will pocket a tidy return. On paper, the firm will book a $19m profit on the convertible notes, equaling a roughly 25% gain. That’s certainly not the biggest gain Francisco Partners has ever put up, but given that the firm spent a fair amount of time underwater on its holding, it’s not a bad outcome at all. And it certainly beats the return from just plunking the money into the broad market, which declined about 10% over the period.

A December rebound in tech M&A

Brenon Daly

Contact: Brenon Daly

After three months of basically standing on the sidelines, tech dealmakers have stepped back into the market in a big way in December. During just the first week of the final month of 2011, the value of announced transactions across the globe hit $8.6bn, led by SAP’s announcement of the largest-ever SaaS deal with its $3.6bn purchase of SuccessFactors and Verizon’s mammoth $3.6bn reach for some excess wireless spectrum with its pickup of SpectrumCo.

To put that $8.6bn of deal value in December into context, consider this: it already equals the full-month total for September and is fully twice the amount of spending in November. But then, last month was particularly grim for M&A. In fact, spending in November sank to its lowest monthly level in more than two and a half years, which was the depths of the Great Recession. Further, the number of transactions in November (only 240) stands as the lowest of any month so far in 2011 and is roughly 20% below the typical monthly volume.

The Houses of Morgan are in demand for on-demand work

Brenon Daly

Contact: Brenon Daly

It turns out that the advisers for the largest-ever SaaS acquisition are also the busiest in terms of restocking the ranks of publicly traded subscription-based software companies. J.P. Morgan Securities, which banked SAP, and Morgan Stanley, which advised SuccessFactors, are upper left on the prospectuses of no fewer than five SaaS vendors currently in registration. Between them, the ‘Houses of Morgan’ have a fairly tight grip on the sector, leading the proposed IPOs of on-demand software shops including Eloqua, ExactTarget, Bazaarvoice, Jive Software and Brightcove.

As lead underwriters, the banks stand to pocket tens of millions of dollars in fees from the upcoming offerings. Additionally, they are likely to build on that initial relationship through other advisory services for the companies. For instance, J.P. Morgan co-led Taleo’s IPO in 2005 and, more recently, advised it on its $125m purchase of Learn.com. On an even bigger scale, Morgan Stanley led the IPOs of both RightNow and SuccessFactors and then advised them on their sales, a pair of deals that totaled a whopping $5bn.

Where to go after the sale?

Brenon Daly

Contact: Brenon Daly, Thejeswi Venkatesh

In an effort to bolster its Smart Grid offering, Siemens AG reached earlier this week for eMeter, a company that the German giant had invested in three years ago. The sale comes after San Mateo, California-based eMeter had looked to raise a round of funding last summer, on top of the roughly $70m it had already raised.

Along with Siemens, other investors in eMeter included Foundation Capital, Sequoia Capital and Northgate Capital. And while the returns may not have been electrifying (if you’ll pardon the pun), we understand that the investors will actually book a decent gain. (Subscribers to The 451 M&A KnowledgeBase can click here to see our record of the transaction, which includes our estimates for both the revenue and sale price of eMeter.)

The ink was barely dry on the agreement when rumors started flying about what eMeter CEO Gary Bloom would be doing now that he has free time on his hands. (Understandably, he won’t be joining Siemens when the deal closes this month.) A longtime former Oracle executive, Bloom is perhaps best known for heading up Veritas at the time of its sale to Symantec, the largest-ever software transaction.

The most intriguing bit of gossip around a possible job for Bloom is that he may step into a senior sales role at BMC, a company where he also serves on the board. Candidly, the Houston-based company could use some additions in that area, as it has seen a number of key departures of sales executives (Luca Lazzaron, Jim Drill) in the past few months. Once a steady performer, BMC has come up short of Wall Street estimates recently. The sluggish growth has clipped one-third of the value of BMC shares since last summer, sending them to their lowest level in more than a year.

SuccessFactors works the other side of the deal

Brenon Daly

Contact: Brenon Daly

In one of the quickest M&A turnarounds, SuccessFactors has gone from a seller to a buyer in just a matter of days. The human capital management (HCM) vendor announced over the weekend that it would be selling itself to SAP for $3.4bn in cash, the largest-ever SaaS deal. The ink was hardly dry on that transaction when SuccessFactors said on Tuesday that it will hand over $110m for Jobs2Web, a recruiting marketing platform with about 150 customers. (For the record, the mammoth SAP-SuccessFactors pairing is expected to close in the first quarter of 2012, while SuccessFactors’ purchase of the Minnesota-based startup should be done by the end of the year.)

The addition of Jobs2Web makes a great deal of sense for SuccessFactors, and in some ways, it shares some similarities to another deal earlier this year – salesforce.com’s $326m pickup of Radian6. In both cases, the startups added technology around mining social media sources and powerful analytics to expand the acquirer’s existing product portfolio.

There are even more similarities between Jobs2Web and Radian6, besides simply having numerals in their names. Both startups were founded far from any of the typical launch pads for tech companies. Jobs2Web has its headquarters in Minnetonka, Minnesota, while Radian6 was in the even more remote location of Fredericton, Canada.

But more importantly, both targets were incredibly capital efficient, each raising about $5m in VC on their way to a solidly valued exit. (Updata Partners was the sole institutional backer for Jobs2Web, which was advised in its sale by Raymond James & Associates.) According to our understanding, Jobs2Web garnered a valuation of roughly 6 times sales in its sale, while Radian6 was valued north of that.

SAP looks to SuccessFactors for success in the cloud

Brenon Daly

Contact: Brenon Daly

After struggling for years to build its own on-demand offering, SAP plans to buy its way into cloud-based software, handing over $3.65bn for SuccessFactors in what would be the largest-ever SaaS acquisition. The deal combines the largest ERP vendor, which has some 500 million users, with the fast-growing human capital management (HCM) provider. However, the acquisition, which is slated to close in the first quarter of next year, does face some challenges. J.P. Morgan Securities advised SAP on the transaction, while Morgan Stanley banked SuccessFactors, after leading its IPO four years ago.

SAP, which is 30 years older than SuccessFactors, has consistently pulled back the targets for its Business ByDesign SaaS suite since it started talking about it a half-decade ago. The difficulty in moving more quickly into a subscription-based software model is underscored by the fact that even after it drops $3.65bn to make SuccessFactors its cloud-based HCM product, SAP will continue to sell its own existing on-premises talent management offering. In fairness, we had our doubts about SAP’s previous big deal – the $6.1bn purchase of Sybase in mid-2010, which thrust the German giant into a host of new markets, including mobility and databases – but the early returns from that combination have been fairly solid.

However, when we compare SAP’s two most recent significant acquisitions, we can’t help but be struck by one gigantic discrepancy: valuation. SAP is paying a price-to-sales multiple that’s roughly twice as rich for SuccessFactors compared to the one it paid for Sybase. SuccessFactors is projected to do about $330m in sales in 2011, meaning it is garnering a rich 10 times revenue valuation, while Sybase traded at about 5x revenue. Obviously, SuccessFactors’ projected growth of 57% this year goes a long way toward explaining that premium, as does the fact that it’s a subscription-based business with 15 million subscribers. But even when compared with Oracle’s recent purchase of RightNow, which went off at about 6.6x trailing sales, SAP’s move seems pricey. We’ll have a full report on the transaction in tonight’s Daily 451.

BMC rumored to be going mobile

Brenon Daly

Contact: Brenon Daly

Rumors are swirling that BMC will announce the acquisition of AirWatch, a purchase that would extend the systems management provider’s reach into the fast-growing mobile device market. The deal, which may print next week, would mark the first major move to consolidate the highly fragmented mobile device management (MDM) space, a market where we count more than 50 vendors of all sizes. AirWatch is one of the largest MDM players, and will get valued that way, according to sources. The rumored price tag is about $250m, or roughly 10 times revenue.

If the deal comes together, it would represent BMC’s only significant acquisition in mobility. The company nibbled in the market last summer, reaching for startup Aeroprise in July. (That was primarily a technology transaction, basically adding mobile capabilities to BMC’s flagship Remedy IT Service Management Suite.) Assuming this deal closes, we would expect other tech giants – both IT management companies as well as security vendors – to look at acquiring MDM capabilities as well.

The new (unexpected) IPO hotspot

Brenon Daly

Contact: Brenon Daly

Forget Silicon Valley or New York or even Boston. The new tech IPO hotspot is a place that typically only gets flown over by investment bankers looking in the more traditional locations for the next companies trying to make it public. What’s the exotic and (potentially) lucrative new launch pad? Indianapolis. That’s right, the same city that has seen its football team go winless so far this season is putting up big points on the board for IPOs.

One company based in Indiana’s capital has already gone public this month, and another one has just followed up with a prospectus of its own. Angie’s List raised more than $100m in its mid-November offering. (The subscription-based service review site priced its shares at the high end of their expected range, and has seen them trade back down to around the offer price.) And just before Thanksgiving, ExactTarget filed its paperwork for a $100m IPO of its own.

Or, more accurately in the case of ExactTarget, the online marketer has re-filed for an IPO. It originally filed its S-1 almost exactly four years ago, but pulled that in mid-2009 as the equity market melted down. In the intervening years, ExactTarget has gotten substantially bigger. In fact, the company’s revenue in its most recent quarter ($55m in Q3) is higher than its total for the last year it was on file (full-year 2007 sales of $48m).

Another area it has bulked up: its underwriting team. Although ExactTarget originally went with a full slate of midmarket banks to bring it public, it now has bulge-bracket firms J.P. Morgan Securities and Deutsche Bank Securities leading the deal, along with original sole lead Stifel Nicolaus Weisel (or Thomas Weisel Partners, as it was known back then).

Securing a tweet

Brenon Daly

Contact: Wendy Nather

Whisper Systems has announced that it has been acquired by Twitter (appropriately enough, the news was tweeted). Terms of the acquisition were not disclosed, but given Whisper’s emphasis on Google Android security, we expect that the deal was as much about the brains behind the technology as it was about the tools themselves. Whisper’s products include WhisperCore, a set of functions for data and network encryption as well as permissions management; WhisperMonitor, an Android-based firewall for mobile devices; Flashback, a cloud-based secure backup service for Android data; TextSecure, a facility for encrypting SMS messages on the fly; and RedPhone, an encryption function for voice that saw heavy use by activists during Egypt’s political uprising.

Twitter has inked 15 transactions, but this is the first one that focuses on security, and it’s in an area that appears to add real gravitas to the communications technology: it’s not just for ensuring that your Uncle Fred can’t accidentally get to your status updates. Mobile devices and protection against regimes make a solid combo, and they bolster Twitter’s use as a real-time reporting system. It’s not clear how many of the current products will remain viable under Twitter’s control, but the reasoning behind the choice of Whisper, as opposed to any number of other mobile device security startups, seems pretty clear.

But we find this deal even more interesting due to the fact that one of Whisper’s founders, security researcher Moxie Marlinspike, has also been making the conference rounds discussing a well-known problem: that of Internet-wide trust in domain name system (DNS) and SSL infrastructure. Certificate authorities that underpin transactions over the Internet have been increasingly attacked directly (with COMODO and DigiNotar being prime examples; the latter went bankrupt as a result of its breach), and DNS-based attacks are on the rise. Marlinspike not only points out the inherent design problems in the trust-based system, but also has proposed the most plausible solution: overhauling the structure into a new system he has dubbed Convergence. When you have access to an Internet security architect of Marlinspike’s caliber, you don’t let it go to waste. We’ll be watching for new developments on a possibly more fundamental level than just secure text messaging for Tweets.