Author: Brenon Daly

Will a stabilized Cisco step back into the market?

Brenon Daly

Contact: Brenon Daly

After back-to-back quarters that roughed up the networking giant, Cisco reported on Wednesday a reasonably strong close to it fiscal year. Fourth-quarter revenue and earnings at the company topped Wall Street’s expectations, and included a rebound in Cisco’s core switch business. The company also projected that its overall growth would continue in the current fiscal first quarter, although the rate would be just 1-4%.

Chief executive John Chambers stopped short of using one of the metaphoric expressions like ‘air pockets’ or ‘uncharted waters’ that he has used in the past to describe economic uncertainty, but he said repeatedly on the conference call discussing results that the economy is facing numerous ‘challenges.’ From our perspective, we wonder if Cisco will get its M&A machine humming again if it continues to stabilize its business.

The company announced a deal in each of the first three months of 2011, but has been notably absent since then. In other words, Cisco has been out of the market since it first let on that business was getting tougher. Will that change now that business appears to be picking up again?

‘Bear-ing’ down on the IPO market

Brenon Daly

Contact: Brenon Daly

This time last week, the Dow Jones Industrial Average was just above 12,000. Even with today’s relief rally, the benchmark index is 1,000 points lower, and is at its lowest level since last October. More broadly, both the S&P 500 and the Nasdaq have dropped 15% over the past month – declines that cut more than $1 trillion of market value from indexes. Amid all of this value being erased from the market, it’s no wonder that companies are struggling to create new market value, in the form of an IPO.

At least three tech vendors are hoping to debut this week, including online backup provider Carbonite, compliance security specialist Trustwave and WageWorks, which provides services around employee benefits. But those offerings by unknown and unproven companies appear to be a tough sell when the shares of well-known firms with a proven track record are getting mauled by the current bear market.

We’re already seeing signs of the fallout from the rout. WageWorks had to substantially trim the price range in its expected IPO last week. And on Monday, Cornerstone OnDemand, which went public in March, shelved a planned secondary offering.

Even if the equity market does stabilize in the coming days, there’s still a fair amount of uncertainty lingering from recent events such as the debt ceiling debate and the downgrade of the US credit rating, a move that would have been almost unimaginable in earlier decades. Reflecting that skittishness, the CBOE Volatility Index, or VIX, closed at 48 on Monday. That’s the highest reading since the recession days of early 2009 and twice the level from earlier this summer. Altogether, it’s a tough time to be on the market, much less come to market.

Fusion-io’s ‘flash-y’ and jumpy M&A currency

Brenon Daly

Contact: Brenon Daly

In the same breath that it announced quarterly results for the first time, Fusion-io also announced its first-ever acquisition. The flash storage specialist reached for IO Turbine, a caching software startup that had only emerged from stealth mode earlier this summer. Our storage analyst, Henry Baltazar, points out that although IO Turbine was only just getting started, its software had been bundled with Fusion-io’s PCIe flash cards. Fusion-io says the pairing boosts performance, and should open up new markets in virtualized environments.

Fusion-io will use both cash and stock to cover the $95m price of its inaugural purchase. The exact makeup of the consideration wasn’t released, but it’s basically one-third cash and two-thirds equity. That breakdown is noteworthy, given that Fusion-io – with some $220m in cash, thanks to its IPO two months ago – could have easily just used greenbacks to pay for IO Turbine.

Instead, the startup felt comfortable enough to take the majority of its payment in Fusion-io shares, which have been noticeably volatile since their June debut. Consider this: During last Thursday’s rough ride for the overall market, Fusion-io was particularly jumpy ahead of its earnings announcement. Shares opened at $28 each, dropped as much as 14% in the first hour of trading, actually popped above the opening trading price at midway through the session, and then slid almost uninterruptedly to close at the low of the day.

Granted, the trading last Thursday for individual equities was overshadowed by the historic 500-point drop in the Dow Jones Industrial Average that day. But we would note that the Dow was in the red from the opening bell, while Fusion-io actually rallied into the green at one point before sliding. Given those sorts of swings, it might not be a bad idea for the new holders of Fusion-io shares to look into a hedging plan for their holdings.

IncrediMail reaches deep for deal

Brenon Daly

Contact: Brenon Daly

Almost exactly a year after taking the top spot at IncrediMail, CEO Josef Mandelbaum has announced his first acquisition at the digital media company. And it’s a big one: IncrediMail, which had just $33m in cash in March, will spend $25m upfront and another possible $15m earnout to add startup Smilebox. IncrediMail will cover at least the first tranche of the payment from its own treasury when the deal closes later this year, but it may look to tap the credit market for the earnout.

The transaction represents a significant bet by the Israeli firm, which has a market cap of just $70m. According to IncrediMail’s forecast, Smilebox should add more than $15m to revenue next year to the vendor, which, organically, has only generated about $30m in sales in each of the past two years. (We should note, however, that those sales are highly profitable for IncrediMail. Its operating margin runs at roughly 40%.)

The fact that Mandelbaum is doing deals for IncrediMail shouldn’t come as much of a surprise. Before taking the top spot at the small public company, he ran the interactive division of American Greetings, where it built out the digital business of the card provider through a series of acquisitions. Among the deals Mandelbaum put together included the pickups of BlueMountain.com, PhotoWorks, Egreetings.com and Webshots. In fact, during his tenure at American Greetings, we understand that Mandelbaum may have even been interested in buying his current firm, IncrediMail.

Saying ‘Goodnight’ to a stand-alone SAS?

Brenon Daly

Contact: Brenon Daly

After years of politely – but unequivocally – rebuffing all M&A approaches, is SAS Institute chief executive James Goodnight suddenly listening to pitches? Rumor has it that Goodnight, who has fashioned the business analytics vendor in the manner of a corporate patriarch of the 19th century, may finally be ready to sell. Any deal for SAS, of course, would have to go through Goodnight, as he owns two-thirds of the company outright.

If SAS is indeed in play – which, granted, is a big, multibillion-dollar assumption – it would represent a dramatic shift in not only the corporate history of the 35-year-old company, but also, more broadly, the landscape for business intelligence (BI) software. Goodnight has steered his firm on a path of independence through the years of consolidation in the BI industry. Most notably, he sat out the spree of deals in 2007 that saw his three largest publicly traded BI rivals get snapped up for a total of some $15bn.

All the while, Goodnight has been shaping a culture at SAS that is a bit of a throwback to the cradle-to-grave employee benefits that other tech vendors, which have to appease outside investors, could never offer. (Among the perks: a pianist who plays in the employee cafeteria, Olympic-sized swimming pools and even onsite Montessori childcare.) SAS employs more than 12,000 people.

SAS’s unique corporate traits have made it not only one of the most valuable privately held software companies, but also one of the most difficult to know what to do with it. (We have referred to SAS as the ‘white elephant’ of the software industry.) A decade ago, SAS worked with Goldman Sachs to explore a possible IPO, but that came to nothing. Goldman is thought to be running the current M&A process for SAS, too.

So that leaves a sale of SAS as Goodnight’s only exit. Companies rumored to be interested in SAS include Hewlett-Packard, IBM, Oracle, SAP and EMC, which is thought to be the lead horse at this point. But there’s still the not-insignificant matter of price. While still loose, the numbers we have heard for SAS, which recorded sales of $2.4bn in 2010, value the company at $12-13bn. Even a price only slightly above that range would make a purchase of SAS the largest-ever software deal, eclipsing Symantec’s $13.5bn stock swap for Veritas Software in late 2004.

Uncertainty chills M&A in July

Brenon Daly

Contact: Brenon Daly

One month into the third quarter, and it looks like tech M&A activity is returning to a ‘normalized’ post-recession level. In August, we tallied global spending on tech and telco deals of just $12bn – putting Q3 on track for about $36bn of aggregate deal value. If the pace holds for the July-September period, the level would essentially match spending in Q3 2009, when the global economy was still mired in the Great Recession.

Overall, since the housing market speculation and related financial industry meltdown knocked the economy into a tailspin, tech M&A activity has ranged, loosely, from $30-50bn per quarter. As mentioned, Q3 2009 was at the low end of that while Q3 2010 was at the high end, with $46bn of announced deal value. (We noted a cold snap in the market in June, which knocked spending to just $10bn – less than half the level it had been in April and May.)

The relative weakness in M&A in the just-completed month of July came as larger economic concerns weighed on the overall market. A number of tech companies (including STEC, Juniper Networks, Riverbed Technology and Fortinet, among others) reported weaker-than-expected results last month, in some cases due to sluggish international sales. Meanwhile, closer to home, the US government teetered on the brink of default at the end of July, although a last-minute agreement to raise the debt ceiling may have headed that off. Nonetheless, the uncertainty around the outlook for the second half of 2011 appears to be blunting the appetite for acquisitions.

2011 activity, month by month

Period Deal volume Deal value
July 313 $12.2bn
June 297 $9.6bn
May 316 $26.5bn
April 287 $26.5bn
March 300 $63.7bn
February 285 $10.3bn
January 323 $11.7bn

Source: The 451 M&A KnowledgeBase

ACI looks to crash S1’s wedding

Brenon Daly

Contact: Brenon Daly

Just a month after announcing its largest-ever acquisition, S1 Corp has found itself unexpectedly (and perhaps unwelcomely) on the other end of a potential transaction. The payments software maker agreed in late June to acquire Fundtech in a stock swap valued at $326m. On Tuesday, ACI Worldwide sought to play the spoiler in that planned marriage, pitching an unsolicited offer to S1 that it says holds ‘significant upside’ compared to the proposed Fundtech deal.

ACI is offering $9.50 in cash and stock for each share of S1, for total consideration of $540m. The bear hug represents a premium of 33% over S1’s previous closing price and the highest price for the stock since late 2004. ACI says it has the financing lined up and could close the deal by the end of the year. Although S1 hasn’t responded to ACI’s proposal, its stock traded in line with the offer, changing hands on Tuesday afternoon at about $9.35.

In some ways, the current interest in S1 is about a half-decade overdue. We speculated in September 2006 that the company was likely on its way out. At that time, S1 was busy unwinding some misguided deals that it had inked years earlier as part of a larger ‘strategic review.’ (The divestitures came at a time when activist hedge fund Ramius Capital was the company’s largest shareholder.) Had it made its move then, ACI could have picked up the company on the cheap: S1 was trading at half the level of ACI’s current bid.

Verint reaches for Vovici

Brenon Daly

Contact: Brenon Daly

Once pretty much a company that only offered call recording, Verint has expanded its business over the past two decades through a series of acquisitions. Most recently, it reached for Vovici, adding the startup’s online surveys offering to its voice-of-the-customer portfolio. Vovici will be slotted into Verint’s Workforce Optimization (WFO) unit, which accounts for more than half of the company’s overall revenue.

However, we don’t expect that Vovici will substantially boost the top line at the WFO division. That business runs at about a rate of $100m per quarter, while we understand that the Herndon, Virginia-based startup was generating somewhere less than $15m in revenue. Verint is paying $57m in cash, with a possible earnout of up to $20m if certain undisclosed milestones are hit. That makes it Verint’s largest acquisition since the $1.1bn purchase of Witness Systems in early 2007.

Dual track, but singular outcomes

Brenon Daly

Contact: Brenon Daly

For the third time in just two months, a tech company that had planned to go public has instead ended up inside a company that’s already public. The latest dual-track sale came Wednesday when Force10 Networks opted to accept a bid from Dell rather than see through its IPO plan. The networking gear vendor had filed its prospectus in March 2010.

The deal follows one month after would-be debutant Apache Design Solutions sold to ANSYS and two months after SiGe Semiconductor went to Skyworks Solutions. Those three transactions probably only generated about $1.2bn in liquidity, including Force10’s reported price of roughly $700m. (As a side note, we might point out that Deutsche Bank Securities was a book runner on all three proposed IPOs.)

As this trio of enterprise-focused startups finds itself snapped out of the IPO pipeline, consumer-oriented companies continue to receive a warm welcome on Wall Street. Consider this: Zillow, which went public earlier this week, now trades at about 20 times trailing revenue. In contrast, Force10, SiGe and Apache Design garnered much more modest valuations ranging roughly from 2-6x trailing revenue in their sales.

Riverbed buys Zeus, but shares go to Hades

Brenon Daly

Contact: Brenon Daly

Announcing the largest deal in its history, Riverbed Technology said it will hand over $110m in cash for Zeus Technology in an effort to broaden its application performance portfolio. Zeus, which sells software for load balancing and traffic management, generated about $12m in revenue over the last year and is expected to contribute some $20m in sales for the coming year. That means Riverbed is paying nearly 10 times trailing sales for Zeus, and that’s not including a potential $30m earnout for the UK-based startup. (Fellow UK-based firm Arma Partners advised Zeus on the sale.)

In addition to being a rather richly valued purchase, the acquisition of Zeus also effectively doubles the amount that Riverbed has spent, collectively, on M&A in its history. The deal will likely bring Riverbed more deeply into competition with the main application delivery control vendors, including F5 and Citrix.

From our perspective, we might note that it’s a good thing Zeus is taking its payment in cash. Why? Riverbed stock lost nearly a quarter of its value on Wednesday. (The WAN traffic optimization provider reported a bit of softness in sales in Europe for the second quarter.) The decline erased all of Riverbed’s gains for 2011, but the stock is still twice the level it was at this time last year.