Author: Brenon Daly

Oracle: The giant moves quietly in M&A

Brenon Daly

Contact: Brenon Daly

For a giant of a company, Oracle certainly strikes quietly when it moves to pick up some companies. Consider its latest purchase, the as-yet-unannounced acquisition of data-quality vendor Datanomic. Although Oracle hasn’t formally announced the purchase, the company does have it listed on its Web page for acquisitions. (That listing followed speculation by several market sources last week that Oracle had indeed sealed the deal.)

Oracle has already shown that it is ready to spend to buy in the data-quality market. A little more than a year ago, Oracle reached for Silver Creek Systems, an OEM partner that provided product-oriented data quality. Shortly after that transaction was announced, my colleague Krishna Roy speculated that Datanomic might be the next data-quality-related vendor to get snapped up, highlighting both Oracle and IBM as possible buyers for the UK-based company. We believe that Big Blue did look at Datanomic, which it considered a nice complement to the business it got when it bought Initiate Systems in early 2010. (Initiate had an OEM arrangement with Datanomic.)

Fittingly for a deal that wasn’t really announced, financials also weren’t revealed. Our understanding is that Datanomic had been posting strong growth recently, increasing revenue some 60% last year to about $15m. That rate, combined with the fact that there were undoubtedly other large bidders for Datanomic, make us absolutely confident that this transaction is significantly larger than Oracle’s related purchase of Silver Creek, which we estimate went off at $40m or so. In fact, we wouldn’t be surprised to hear that it was in the neighborhood of twice that amount.

TI-NatSemi: Large and analog

Brenon Daly

Contact: Brenon Daly

The fragmented market for makers of analog integrated circuits looks a whole less scattered now that Texas Instruments has reached for National Semiconductor. Already the largest analog vendor, TI will have some 17% of the market provided its $6.5bn all-cash offer for NatSemi closes later this year. (If it can’t close the deal, for whatever reason, TI faces a $350m reverse breakup fee, while NatSemi would have to pay a $200m termination fee.)

As it stands, the pending purchase of NatSemi would be the third-largest semiconductor deal, but the single largest by a non-financial buyer. Recall that in the pre-Credit Crisis days of 2006, buyout consortiums took Freescale Semiconductor private in a $17.6bn buyout while another private equity (PE) club carved the semiconductor business out of Royal Philips Electronics. Given the travails that the Freescale LBO has faced over the past half-decade, we suspect that PE shops won’t be looking to do any buyouts that big anytime soon.

Epiq’s expensive e-discovery deal

Brenon Daly

Contact: Brenon Daly

Announcing the largest e-discovery deal in some three-and-a-half years, Epiq Systems said earlier this week that it will borrow $100m to acquire Encore Discovery Solutions, a service provider for law firms. (My colleague Nick Patience has the full details on the acquisition.) The rationale is fairly straightforward: Epiq wanted to shore up its presence in the western US, so it reached for Phoenix-based Encore. That sort of geographic consolidation happens all the time – but it rarely happens at the kind of valuation that Epiq is paying in its services play.

Encore had generated some $40m in revenue, according to Epiq, meaning it’s trading at 2.5 times sales. That’s a fairly high multiple for a services shop, which typically have lumpy – and concentrated – revenue. (That goes double for a market like e-discovery that is largely driven by unpredictable events like lawsuits.) Unlike Epiq, Encore didn’t have its own e-discovery software, instead licensing it from other vendors. Clearly, however, the lack of IP didn’t hurt Encore’s price.

More representative of the e-discovery market is probably Unify Corp’s purchase last summer of Daegis. Unify paid $37.5m, or 1.6x sales, for Daegis, which generates about half of its sales from tools and the other half from associated services. But from Epiq’s view, the purchase of Encore sets up a relatively low threshold for a return (it is borrowing at around 3.5%) and adds bulk to a business that has a fair amount of momentum. Epiq said recently that its e-discovery business has posted five straight quarters of growth, finishing 2010 with sales at the unit up 45% to a record $81m.

Multiples match on Lawson and Epicor

Brenon Daly

Contact: Brenon Daly

If nothing else, we now know the clearing price for ‘vintage’ ERP companies. (Or more accurately said, we know the proposed clearing price.) That’s at least one conclusion we can draw from the highly unusual situation where there are two deals going on simultaneously for two of the industry’s larger players, Epicor Software and Lawson Software. The two planned acquisitions – representing, collectively, $2.8bn of spending – line up almost exactly in several key metrics.

The numbers: the equity value of Apax’s offer for Epicor is $976m, with an enterprise value (EV) of $1.1bn. On an EV basis, that works out to about 2.5 times trailing sales and roughly 5x maintenance revenue. That mirrors very closely the takeout valuation that Lawson received in an unsolicited bid last month from PE-backed Infor Global Solutions, which it is currently reviewing. Lawson is being valued at 2.4x trailing sales and about 4.5x maintenance revenue. Even on an EV/EBITDA basis, the valuations are not all that dissimilar: Epicor garnering a 20.5x valuation, compared to Lawson’s 15.4x.

Apax goes double or nothing in big software bet

Brenon Daly

Contact: Brenon Daly

Apax Partners is going double or nothing in the latest addition to its software portfolio. The buyout firm plans to spend a total of $2bn to put together a pair of old-line ERP vendors, Epicor Software and Activant Solutions. And it is very much a ‘paired’ deal. In fact, according to terms, Apax closing its Activant purchase is a precondition of its planned take-private of Epicor.

That said, neither Apax’s purchase of Activant from its current private equity (PE) owners nor the buyout of Epicor should present much of a problem to get closed this quarter. But it does underline the necessity of cost ‘synergies’ in a deal (or in this case, two) for a mature company. (We noted that fact in the very similar proposed take-private of Lawson Software.)

If the double-barreled deals go through (as we assume they will), it would mark the end of a two-and-a-half-year effort by Elliott Associates to get Epicor sold. The hedge fund accumulated a 10% stake in Epicor in 2008 and then floated an offer of $9.50 for each remaining share of Epicor. It later trimmed that to $7.50 per share as the software company’s outlook deteriorated. (Epicor’s total revenue dropped 16% in 2009, and sales in 2011, while expected to increase, are still forecasted to come in below the level of 2008.) Apax is set to pay $12.50 per share for Epicor – an offer that Elliot has signed off on.

EMC bolsters security portfolio with NetWitness

Brenon Daly1 Comment

Contact: Brenon Daly, Josh Corman

Announcing its first deal in almost five months, EMC moved to bolster its security management portfolio by picking up fast-growing NetWitness. The purchase adds the rich network data and powerful analysis capabilities of the NetWitness NextGen platform, which is a bit like a TiVo for network traffic – capturing, indexing and storing massive amounts of network traffic. From a financial point of view, it is EMC’s first significant security acquisition since buying RSA Security in mid-2006.

In fact, we would estimate that the price of NetWitness tops EMC’s spending, collectively, on the four bolt-on acquisitions it has made to RSA since the $2.1bn deal. According to our understanding, NetWitness more than doubled revenue to about $45m in 2010. Given the growth rate and premium customer list NetWitness had assembled, we have no trouble believing market speculation that EMC paid $450-500m for NetWitness. A double-digit multiple isn’t out of whack for a fast-growing startup that has strategic value to EMC. We understand, for instance, that last summer EMC paid just shy of $400m for Greenplum, a data-warehousing startup that was clipping along at just under $30m in sales.

Tech M&A spending hits post-recession high

Brenon Daly

Contact: Brenon Daly

Lifted by AT&T’s massive consolidation play, tech M&A spending in the just-closed first quarter hit a post-recession record of $84bn – one-third more than the previous high-water mark of $62bn set in Q2 2010. Additionally, the number of transactions in the just-completed first quarter (881) also set a new record. (See our full report on the first-quarter activity.)

And yet even without the landmark telecom deal, Q1 deal flow was surprisingly strong, particularly in March. Excluding AT&T’s planned purchase of T-Mobile USA, the quarterly spending total was higher than both the preceding Q4 2010 and the year-earlier Q1 2010. Most of that, however, was due to a flurry of activity in March, which saw spending at more than twice the monthly rate of the previous half-year and the highest level since last summer. (Again, that’s backing out the $39bn that AT&T is set to spend on T-Mobile USA, a deal that was announced on March 21.)

As the gigantic telecom transaction illustrates, M&A is an inherently lumpy business. So projecting annual totals from a single quarter’s activity doesn’t necessarily make for a reliable forecast. Nonetheless, we would note that the frenetic start to 2011 puts it on track for nearly $340bn in spending for the year. If it comes in at roughly that level, it would mark the highest annual spending total in four years and would not be too far from the level in 2005, just before tech M&A set off on a two-year record run.

Recent quarterly deal flow

Period Deal volume Deal value
Q1 2011 881 $84bn
Q4 2010 775 $37bn
Q3 2010 768 $46bn
Q2 2010 773 $62bn
Q1 2010 847 $30bn

Source: The 451 M&A KnowledgeBase

Lawson: silence, suitors and synergy

Brenon Daly

Contact: Brenon Daly

If Lawson Software had held its scheduled call later this afternoon to discuss its third-quarter earnings report, we suspect that attendance would have been a bit higher than usual. Instead, the old-line ERP vendor scrapped it, citing the two-week-old unsolicited offer from industry consolidator Infor Global Solutions. (Those sorts of things tend to happen to companies that count Carl Icahn as their largest shareholder.) Lawson, advised by Barclays Capital, has said only that it is reviewing the proposal.

While Lawson’s silence is entirely understandable from a company that’s been put in play, it did nothing to dampen investor speculation that another suitor would show up. The stock, which has traded above the $11.25-per-share bid since it was launched, inched a little higher to $12.14 in Thursday afternoon activity. Lawson shares haven’t seen these levels since March 2002.

Perhaps inevitably, Oracle’s name has surfaced as a potential buyer. While Lawson isn’t particularly cheap, it’s also not particularly expensive. Its current market cap of $2bn works out to about 2.6 times projected sales of $770m for the current fiscal year and roughly 15x EBITDA. Another way to look at it: the market values Lawson at about 5x its maintenance revenue. (For comparison, Epicor Software trades at 1.7x sales and roughly 3x maintenance revenue.)

For buyout shops, Lawson’s valuation is already at the upper end of the range that could still deliver a decent financial return, we would think. Of course, Infor is owned by a private equity firm, Golden Gate Capital. But in terms of bidding, Infor is more of a strategic buyer than a financial one when it comes to ‘synergies.’ After all, privately held Infor already has the corporate infrastructure in place to run a $2bn business, roughly three times the size of Lawson.

The ever-increasing appetite of salesforce.com

Brenon Daly

Contact: Brenon Daly

Salesforce.com just keeps taking bigger bites. The company announced Wednesday that it will hand over $326m ($276m in cash and $50m in stock) for social-media monitoring company Radian6. Not only is it salesforce.com’s highest-priced acquisition, it also likely brings more revenue than any other deal the company has done, at least based on our estimates for previous transactions and the company’s guidance for Radian6. Salesforce.com indicated that the Canadian startup would contribute about $50m in sales during the current fiscal year, which is about two months old.

The purchase, which is expected to close by July, also puts an exclamation point on the changes in dealmaking at salesforce.com. The 11-year-old SaaS pioneer stayed out of the M&A market for the first half of its corporate life. And even when it started doing deals in 2006, the first half-dozen or so acquisitions were all small, valued in the low tens of millions of dollars. Salesforce.com only started announcing major purchases last year, with its $142m reach for Jigsaw Data followed by its $249m takeout of Heroku.

As sizeable as the deal is inside saleforce.com, it also looms pretty large inside the burgeoning social CRM market. Consider this: at roughly one-third of a billion dollars, salesforce.com’s pickup of Radian6 is more than 50 times larger than the acquisition of another social CRM startup just last week. Privately held Meltwater Group paid just $6m for JitterJam to bolster its social CRM offering, which the company hopes to be a $100m business within three years.

Mentor Graphics’ ‘marginalized’ size

Brenon Daly

Contact: Brenon Daly

In knocking down Carl Icahn’s unsolicited bid, Mentor Graphics cited the regulatory difficulties that would likely accompany a combination with either of the two other large vendors of electronic design automation (EDA) software. However, the relative financial performances of the trio show the advantages of consolidation. As is true for most mature businesses, scale matters.

For the most part, the EDA industry has narrowed to three main suppliers: Mentor, Cadence Design Systems and Synopsys. Mentor and Cadence are basically the same size at slightly more than $900m in annual sales, while Synopsys is about half again as large. (It finished fiscal 2010 at $1.38bn in revenue).

Far more important than just top line, however, is the fact that Synopsys has used its size to run more efficiently – far more efficiently – than its smaller rivals, at least when measured by operating margin. (Cadence doesn’t figure into this discussion because it has posted operating losses in each of the past three years.) In Mentor’s recently closed fiscal year, it posted a 6% operating margin – its highest level in three years. That’s all well and good, but we should note that the level is just half the margin that Synopsys currently runs at.