Author: Brenon Daly

Big Blue’s recent shopping spree

Brenon Daly

Contact: Brenon Daly

After a slow start to the year, IBM has dramatically picked up the pace – and the spending – in its M&A program. Big Blue only announced its first deal of 2011 in late March, and then was out of the market for nearly a half-year. But in the past two months alone, it has announced four deals. And each of the purchases, according to our estimates, was valued in the hundreds of millions of dollars.

Since late August, IBM has acquired analytics and visualization software vendor i2 Group, an analytics firm focused on financial services called Algorithmics, security management specialist Q1 Labs, and – just last week – HPC pioneer Platform Computing. Although IBM only released the value of one of those transactions, we estimate the collective tab on the two-month shopping spree is in the neighborhood of $1.5bn.

The purchases come as IBM shares have been trading around their highest-ever levels. So far this year, Big Blue stock has tacked on some 27%, while the Nasdaq Index has basically flat-lined. IBM will give its latest check-up to Wall Street after the closing bell today, with investors looking for third-quarter earnings of about $3.22 per share on sales of some $26.3bn. Ahead of the release, the stock was trading in-line with the broad market.

Oracle’s unlikely acquisition

Brenon Daly

Contact: Brenon Daly

After spending last week with its customers and partners at its annual trade show, Oracle will be meeting later this week with its owners. The company’s annual shareholder meeting is slated for Wednesday. If the talk at OpenWorld is any indication, the question of M&A is almost certain to come up during tomorrow’s meeting of shareholders in the acquisitive company. Over the past decade, Oracle has purchased more than 80 companies at a total cost of more than $40bn.

Given some of the recent remarks, however, we’re fairly confident in scratching at least one name off of any potential shopping list: Hewlett-Packard. Some people have recently suggested that buying the reeling HP would get Oracle significantly closer to its goal of mirroring IBM’s strategy of providing not only single technology products, but also integrated systems as well as services to support the products. (The fact that Oracle hired ousted HP honcho Mark Hurd last year only added to the intrigue around the possible pairing.)

At Oracle’s meeting with financial analysts during OpenWorld, CFO Safra Catz fielded a question about the company’s appetite for a (hypothetical) transaction valued in the tens of billions of dollars. While not speaking specifically about HP, Catz made it nonetheless pretty clear that Oracle – and more to the point, her boss Larry Ellison – would be extremely unlikely to do a deal like that.

The reason? In all likelihood, Oracle would probably have to use at least some equity to cover the purchase of a company like HP, which currently has an enterprise value of $64bn. (And that’s without any premium on a stock price that is down 40% so far in 2011.) Noting that CEO Ellison owns some 1.1 billion shares of Oracle, Catz summed up the calculus this way: Would Ellison really want to trade some of his stake in Oracle, which she described as having its strongest-ever product portfolio, for a chunk of HP? That’s not a ‘compelling’ trade, she said dismissively.

Keynote adds to its mobile monitoring business

Brenon Daly

Contact: Brenon Daly

Moving to bolster its enterprise mobile monitoring portfolio, Keynote Systems said Monday that it will hand over $60m in cash for testing and quality assurance (QA) startup DeviceAnywhere. (Additionally, terms provide for a potential $30m earnout over the next two years, although Keynote indicated that any payments would likely be back-end loaded.) Keynote will finance the deal, which is expected to close in two weeks, entirely from cash on hand. There were no advisers on either side of the transaction.

DeviceAnywhere is based about five miles from Keynote’s headquarters in San Mateo, California, and will move most of its 119 employees into the building that Keynote owns. The startup had attracted more than 1,200 customers, although about 1,100 of those are developers with the remaining 100 being enterprises. DeviceAnywhere brings testing and QA capabilities for mobile websites and applications to Keynote, which has focused almost exclusively on monitoring. It generated about $20m on a trailing revenue basis.

Taken together, DeviceAnywhere and Keynote’s existing enterprise mobile monitoring unit would generate roughly $26m in revenue – a level that Keynote executives project could quadruple in the coming years. The purchase of DeviceAnywhere is Keynote’s first acquisition since April 2008. Since then, shares of Keynote have basically doubled, compared to a single-digit percentage gain for the Nasdaq over that period. Keynote will discuss the acquisition more fully when it reports fiscal year results on November 3.

The single most accretive tech acquisition ever

Brenon Daly

Contact: Brenon Daly

With the passing of Steve Jobs earlier this week and all the deserved praise for the late Apple impresario, we can add one more tribute from the world of M&A: Jobs is the central figure in what’s probably the most accretive tech deal ever done. Remember that it was the purchase in December 1996 of the company that he founded after initially getting fired from Apple (NeXT Computer) that brought Jobs back to Apple.

So viewed that way, the once-and-future king at Apple only got to play that role because Apple acquired NeXT for some $400m. Without that deal, there’s every chance that Jobs wouldn’t have returned to Infinite Loop, and that the company would have simply continued on its path toward irrelevance in the PC Era. Instead, Job worked his magic, introducing computers, music players, phones, tablets and other products that customers may not have known they wanted but found they couldn’t live without.

To get some sense of the impact of Jobs’ return to Apple, consider this: when Apple acquired NeXT, shares of the company were in the single digits. They closed Thursday at $377. Under Jobs’ watch, shares rose almost 6,000%, giving it a current market valuation of $350bn. Apple currently enjoys the richest market cap of any company on the planet. And all that came from a deal that was part IP and part HR.

Double-barrel SIEM deals

Brenon Daly

Contact: Brenon Daly

In a highly unusual twist of timing, both IBM and McAfee announced significant acquisitions of security event and incident management (SIEM) startups within hours of each other Tuesday morning. First up, IBM said it was adding Q1 Labs as part of a new initiative around ‘Security Intelligence.’ (The announcement confirmed the rumored pairing between the two companies that we noted on Monday.) That was followed just two hours later by McAfee’s reach for NitroSecurity.

The transactions, which are both expected to close before the end of the year, take the two largest privately held SIEM vendors off the market. According to our estimates, Q1 was tracking to about $70m in sales this year while NitroSecurity was likely to generate roughly $30m. Between them, the two startups counted more than 2,300 customers. Further, Q1 and NitroSecurity were the highest-ranked private SIEM providers in a recent survey of IT buyers by TheInfoPro, a division of The 451 Group.

All of that goes a long way toward explaining why both startups got valuations substantially above prevailing market multiples. Collectively, Q1 and NitroSecurity took in a total of about $75m in funding over the decade or so they had been in business. As we understand it, the aggregate price for the pair is somewhere in the neighborhood of 10 times the amount they raised.

The two halves of the third quarter

Brenon Daly

Contact: Brenon Daly

It’s rare that a single quarter is divided so cleanly into two completely different – almost irreconcilable – halves. Yet that’s exactly how tech M&A played out in the just-closed third quarter. From the start of July until the middle of August, dealmaking followed the same arc of recovery that it had tracked for most of 2011. And then, seemingly overnight, the stability and confidence vanished, swept away by renewed concerns about the state of the global economy. That left M&A in the back half of the quarter looking a lot like it did in the recession years of 2008 and 2009, rather than earlier this year.

Recent quarterly deal flow

Period Deal volume Deal value
Q3 2011 934 $62bn
Q2 2011 942 $67bn
Q1 2011 914 $86bn
Q4 2010 794 $41bn
Q3 2010 791 $50bn

Source: The 451 M&A KnowledgeBase

Just to put some numbers to the split Q3, consider this: two-thirds of M&A spending came in the first six weeks of the quarter, with the final six weeks accounting for the remaining one-third. (Incidentally, that’s the direct inverse of the typical seasonal pattern for Q3, which almost invariably finishes stronger than it starts.) The number of deals in the second half of Q3 dropped more than 10%. More significantly, however, the transactions that did get done toward the end of the quarter were much more conservative than the deals inked earlier. Of the 20 largest transactions announced in the July-September period, only four came in the back half of Q3. Click here for a full report on the challenging third quarter.

Is Q1 the one for IBM?

Brenon Daly

Contact: Brenon Daly, Andrew Hay

Despite posturing for a public market debut for some time, we understand that Q1 Labs may instead be headed for a trade sale. IBM is reportedly set to acquire the fast-growing ESIM vendor in a deal to be announced this week. The price for Q1, which recorded sales of some $60m over the past four quarters, couldn’t be learned. Goldman Sachs was in line to be lead underwriter for the IPO but instead will get the print, according to our understanding.

Assuming it closes, the deal would come almost exactly a year after ESIM kingpin ArcSight sold to Hewlett-Packard. (In that process, we gather that IBM was a bidder for ArcSight through the late rounds, as was EMC. McAfee was interested as well but was priced out relatively early on.) HP paid roughly 8 times trailing sales for ArcSight. Slapping that same multiple on Q1 values the Waltham, Massachusetts-based company at nearly a half-billion dollars. IBM had paid a similar multiple for Netezza and BigFix and only a slightly lower one in its most recent significant security acquisition, Guardium.

Rumors about a possible sale of Q1 have swirled for a number of years, with suitors ranging from Cisco to Oracle to McAfee. However, the most consistent name attached to Q1 has been its largest OEM partner, Juniper Networks. Indeed, sources indicated earlier this year that Juniper was considering an acquisition but a wide gap emerged over the valuation. Apparently, Juniper was offering about $300m, while Q1 was holding out for a number significantly higher than that.

The September slump

Brenon Daly

Contact: Brenon Daly

It seems September wasn’t just a month to forget for the Boston Red Sox. Tech M&A also had a slump of its own this month. Although the decline in dealmaking wasn’t nearly the historic proportion of the ‘BoSox debacle,’ which saw the team drop 20 of its final 27 games and miss the playoffs, spending on acquisitions in September came in at its lowest monthly tally in 2011.

The aggregate value of all tech deals announced in September totaled just $8.5bn. (And nearly half of that amount came from a single transaction, Broadcom’s $3.9bn all-cash offer for NetLogic Microsystems.) Not only is September the lowest monthly total so far this year, it also represents a decline of one-third from spending in September 2010.

The slowdown in September also reverses the typical seasonal pattern of the third quarter. In recent years, roughly two-thirds of the entire M&A spending in Q3 has taken place in the back half of the quarter. But then, economies around the globe are currently facing more challenges and uncertainties than they have at any point since the Great Recession ended. That could make for a pretty tough finish for M&A in 2011, a year that started out solidly on the road to recovery.

M&A activity, Q3

Period Deal volume Deal value Number of deals valued at $1bn or more
Sept. 2011 279 $8.5bn 1
Aug. 2011 335 $40.2bn 6
July 2011 319 $12.9bn 4

Source: The 451 M&A KnowledgeBase

A renaissance of PE interest in Renaissance

Brenon Daly

Contact: Brenon Daly

In 2010, PLATO Learning went private in a relatively straightforward process that took just two months from Thoma Bravo’s announcement of the leveraged buyout (LBO) of the online education vendor to the close of it. Now, privately held PLATO is drawing out – and making more expensive – the LBO of fellow online education provider Renaissance Learning. PLATO has been part of a bidding war for Renaissance that has been playing out since mid-August.

In the original offer, buyout firm Permira planned to acquire Renaissance, which has been public since 1997, in a deal valued at $440m. (Somewhat unusually, terms call for Permira to pay one price for Renaissance’s common shares that trade on the Nasdaq while paying a lower price to the cofounders of the company, who control 69% of the equity.) PLATO then topped Permira’s opening bid a week later.

Earlier this week, Permira raised its offer, as did PLATO. However, the board continues to support the Permira bid – even though it values Renaissance at $16m less than the offer from PLATO. The reason? The cofounders don’t want to sell to PLATO. Other shareholders, who represent the remaining 31% of Renaissance equity, will have a chance to vote on Permira’s offer on October 17

SaaS giant salesforce.com thinks small

Brenon Daly

Contact: Brenon Daly

Just several months after putting money into Assistly in its second round of funding, salesforce.com decided Wednesday to pick up the whole startup for $50m. The purchase should help the SaaS giant extend its customer service offering, Service Cloud, to small businesses. Founded in 2009, Assistly had drawn in more than 1,000 customers, although not all of those are paying. (Salesforce.com declined to give a breakdown on paying vs. nonpaying customers, but indicated revenue at the startup was a tiny amount.)

The acquisition marks the third time salesforce.com has stepped into the M&A market to bolster its customer service product. Three years ago, it reached for InstraNet, a startup that was led by Alex Dayton, who continues in an executive role for the customer service offering at salesforce.com. A year ago, salesforce.com quietly added Activa Live. (Although terms weren’t disclosed, we suspect the bill for that purchase probably only ran in the single digits of millions of dollars.) The net result of those acquisitions – along with healthy organic growth – is that Service Cloud is now the largest single product outside salesforce.com’s core sales force automation product.

Additionally, salesforce.com says Assistly will be part of its upcoming launch of a ‘small business cloud’ product. In that, Assistly will be joining the collaboration offering that salesforce.com picked up with its acquisition of SMB-focused startup Manymoon in February. The reason for the new downmarket products is pretty clear when you remember that salesforce.com gets roughly one-third of its overall revenue from small businesses.