Author: Brenon Daly

Buying a new look

Brenon Daly

Contact: Brenon Daly

In any business, it’s tough to take the old and make it new. In fact, that sometimes requires a little outside help. That came through in Walgreens’ purchase Thursday of Drugstore.com. After all, here is Walgreens – a 110-year-old chain that’s the largest drugstore in the US – saying it can’t necessarily get its online business where it wants it to be on its own. So the company is set to hand over $429m in cash for Drugstore.com to bolster its online sales.

As an aside, the deal caps a run by Drugstore.com that in many ways embodies the whole Internet Bubble. It was a hot IPO back in 1999, just five months after opening its virtual doors. Sales were still in the single digits of millions of dollars when it went public. Of course, investors couldn’t get enough of the freshly minted equity – at least not until the Bubble burst in 2000.

After that, shares never again traded in the double digits. Walgreens is set to pay $3.80 for each share of Drugstore.com, more than twice the market said the stock was worth the day before the deal was announced. The kicker on Drugstore.com is that the company was probably more highly valued when it was a tiny startup in a frothy era than today, when it is a business generating about a half-billion dollars in sales.

Actually, this is the second transaction in a month that has seen an Old Economy company pay up to join the New Economy. In mid-February, Nordstrom threw $180m at HauteLook to get into the private-sale marketplace. (Terms also include a potential $90m earnout for HauteLook.) To understand the motivation, consider the relative age of the two sides in the transaction: Nordstrom opened its first store in 1901, while HauteLook went live (in the digital parlance) only in 2007.

Oracle has gone silent

Brenon Daly

Contact: Brenon Daly

While investors will be tuning in for Oracle’s Q3 report after the market’s close today, we can’t help noting that there hasn’t been much news from the consolidator recently. It has yet to announce a deal in 2011, an uncharacteristic dry spell for a company that averaged an acquisition every six weeks in each of the past two years. In Q1 2010, Oracle announced three transactions and even in the recession-wracked Q1 2009, the software giant announced a pair of deals – but nothing so far this year.

In fact, Oracle has been out of the market since it spent $1bn on Art Technology Group in early November, nearly five months ago. And it’s not just Oracle that’s currently on the M&A sidelines. Fellow big-name buyers such as Microsoft, Symantec, EMC and Nokia have all yet to open their accounts in 2011. Even serial shopper IBM was also on that list until earlier this week, when it announced its purchase of Tririga

A post-recession spending record — and then some

Brenon Daly

Contact: Brenon Daly

The first-quarter M&A totals for the tech industry suddenly look a lot different. AT&T’s announced acquisition of T-Mobile USA from parent Deutsche Telekom dramatically inflates the spending, more than doubling the collective value of the 750 transactions announced so far in 2011. The $39bn deal (the largest purchase in the telecom industry in a half-decade) compares to $29bn worth of transactions in the first 11 weeks of the year.

Further, it wasn’t just Ma Bell’s massive consolidation play in the wireless space that pushed up the total on Monday. Liberty Global announced plans to spend a total of $4.5bn on German cable operator Kabel Baden-Württemberg. Additionally, Charles Schwab said it will shell out $1bn in stock for optionsXpress Holdings, its largest deal in a decade. And Broadcom continued its recent steady run of dealmaking, handing over $313m for Provigent. Altogether, that pushed M&A spending so far this quarter to $74bn – the highest quarterly total since Q2 2008. And the post-recession record is only headed higher: the first quarter doesn’t wrap up until a week from Thursday.

Ma Bell’s mobile move

Brenon Daly

Contact: Brenon Daly

In the largest US telco deal in a half-decade, AT&T will hand over $39bn in cash and stock for T-Mobile USA. Assuming it goes through, the combination would create the country’s largest wireless provider, with some 130 million subscribers. The consolidation move, which has been a hallmark of AT&T over the past decade, would give the carrier one-third more wireless subscribers than second-place Verizon and more than twice the number of Sprint.

Clearly conscious of its increased market share, AT&T took a number of steps – both in language and in terms – to blunt criticism and concerns over the concentration. For instance, in its release AT&T tosses a sop to regulators by portraying this move as a step to connecting ‘every part of America to the digital age’ – a quote borrowed from President Obama and backed by the Federal Communications Commission. (The FCC and the US Department of Justice will likely cast a sharp eye on the planned deal, which AT&T hopes to close in a year or so.) And, in an effort to shore up populist support, AT&T highlights in its release that it is the only major wireless carrier to be a union shop. We can’t remember the last time a major acquirer trumpeted its union status in an M&A release.

Aside from the spin in the official release, the terms of the proposed transaction also appear to us to be structured with an eye toward knocking down as much uncertainty as possible. For instance, AT&T collared the $14bn in stock that it is set to give to T-Mobile USA’s parent Deutsche Telekom. (Although, at least based on Wall Street’s initial reaction, that wasn’t necessary as investors actually nudged the Dow component 1% higher.) But what really caught our eye was the stiff breakup fee: if AT&T has to walk away from the deal, it will be on the hook for a $3bn payment, as well as have to transfer an undefined chuck of spectrum to its would-be partner. That’s a lot of incentive to get it closed.

Cornerstone: the newest — and priciest — HCM vendor

Brenon Daly

Contact: Brenon Daly

So much for the ‘debut discount.’ Cornerstone OnDemand hit the market Thursday at an eye-popping valuation, going against the recent trend toward conservative pricing for new issues. The human capital management (HCM) vendor priced its shares at $13 each, above the indicated range of $9-11 each. (Goldman Sachs & Co and Barclays Capital are leading the IPO.) By early afternoon Thursday, the stock was changing hands at about $19.

The offering gives Cornerstone one of the richest valuations of any recent IPO. At $19 per share, the company’s market cap is roughly $900m. That’s 15 times trailing bookings (not sales) and likely in the neighborhood of 9x projected bookings. (Our math: Cornerstone reported 2010 bookings of $61m, up 74% from the previous year. Assuming that the growth rate comes down a smidge to 60-65% for 2011, that would put Cornerstone’s full-year bookings at $100m, give or take.)

Cornerstone’s valuation vastly outstrips what the market says rival Taleo is worth, and even puts it ahead of SuccessFactors, which had been the HCM industry’s ‘favorite child.’ (That’s been the view on Wall Street, anyway.) SuccessFactors, which went public in late 2007, currently garners a $2.7bn market cap, roughly 10.5x trailing bookings and about 8x projected 2011 bookings. We should note that both SuccessFactors and Taleo are about four times the size of their newest rival on the public market. But for now, both of them are looking up at Cornerstone.

Mentor Graphic’s looming showdown

Brenon Daly

Contact: Brenon Daly

Lost in the din surrounding Carl Icahn’s recent effort to take out Lawson Software is the fact that the activist shareholder is already much further along with his stirrings against another target, Mentor Graphics. In less than two months, the electronic design automation company is slated to hold its annual shareholder meeting – a get-together where Icahn hopes to replace several board members as a way to spur a sale of the company. It’s shaping up to be a real showdown.

Last month, Icahn floated an offer of $17 for each of the roughly 112 million shares of Mentor, giving the unsolicited bid an equity value of $1.9bn. (Icahn already owns 15% of Mentor, which is nearly four times more than all the company’s directors and executives hold collectively.) Icahn has been joined in his efforts – in practice, if not officially – by another hedge fund, Casablanca Capital, which has a 5% stake in Mentor.

Mentor has told its shareholders to stick with its current board and strategy. In the proxy filed Tuesday, the company takes a swipe at Icahn’s efforts, saying his selections to the board lack ‘the collective knowledge, skill and experience’ of the current directors. Recall that Mentor’s ‘just say no’ defense successfully stymied an unsolicited bid from rival Cadence Design Systems nearly three years ago. Cadence pulled its offer just two months after launching it, but not before blasting Mentor for refusing to even open its books to a prospective buyer. We doubt that Icahn will go away as quickly and quietly if Mentor continues to stiff-arm him

HP’s ‘cloudy’ strategic vision

Brenon Daly

Contact: Brenon Daly

Under Mark Hurd, Hewlett-Packard looked to bulk up all of its divisions through M&A. But software was definitely an afterthought. Hurd’s most-notable transaction, of course, was the $13.9bn purchase of services giant EDS. In his half-decade at the helm, Hurd also sprinkled in deals for companies selling gear for printing, storage and networking, among other areas.

Ever since Leo Apotheker replaced Hurd, people have been speculating that software would become a renewed focus at HP, if for no other reason than Apotheker spent some two decades at software giant SAP. Indeed, as he laid out his grand plan on Monday for HP in his first major strategy speech as CEO, Apotheker hit on software a number of times. (At least we think he did. It was hard to tell what was actually being announced in HP’s buzzword-laden release, which was heavy on ‘convergence’ but light on specifics.)

Apotheker also appeared to indicate that HP would continue shopping, with both security and information management as focus areas for M&A. Actually, that’s already showed up in deal flow since he took over. HP’s three most recent acquisitions (Vertica Systems, Stratavia and ArcSight) have all been done by the software group.

But if we’re brutally honest, we might suggest that the issue with HP’s software business isn’t so much adding to what’s there as it is just making what’s already there actually deliver. While other tech giants rely on software for outsized growth and rich cash generation, neither is particularly true for HP.

HP’s software division is growing in the mid-single digits while posting an operating margin that’s just half the level of most other rivals. To underscore the underperformance, consider this: even though HP’s old and dusty printer business is 10 times larger than its software division, they have the same growth rate. Dare we say that HP’s software unit could probably benefit from a Hurd-like focus on operations by Apotheker?

Lawson ‘Infor-med’ of unsolicited offer

Brenon Daly

Contact: Brenon Daly

In the middle of last year, we penciled out a takeout scenario for Lawson Software that gave the old-line maker of ERP software an equity value of about $1.7bn. Turns out we were off by just $100m. On Friday, the acquisitive, private equity-backed rollup machine Infor Global Solutions floated an unsolicited $1.8bn offer for Lawson. The target said only that it has retained Barclays Capital to advise it on the process.

We thought Lawson might find itself in play because activist shareholder Carl Icahn had taken about 10% of the company’s stock and started talking about ‘maximizing shareholder value.’ (Some of that has already showed up in Lawson’s recent stock chart. When Icahn revealed his stake last summer, shares were changing hands at about $8 each, compared to the $11.25 offer from Infor. We would note that the stock traded through the bid on Monday, hitting a high of $12.87 before settling down at about $12.25 in afternoon activity.)

In many ways, Lawson presents something of an easy target for Icahn and the would-be buyout group. License revenue has slipped in both of the company’s quarters so far this fiscal year. Meanwhile, it has been deemphasizing its consulting services, which is still one-third of total sales. So that business is dropping, too. The only growth has been seen in Lawson’s maintenance revenue. That business runs at an 80% gross margin, one of the main reasons Lawson generates so much cash.

Over the past four quarters, Lawson has thrown off some $116m of EBITDA on $745m of sales, a healthy 16% margin. If we put that trailing performance against Infor’s bid, Lawson is garnering a not-too-shabby multiple: 2.4 times sales and 15x EBITDA. Infor’s bid represents the highest price for Lawson stock in nine years, and would be CEO Charles Philips’ first deal since coming over from Oracle last October.

Slimmed-down LSI catches eyes on Wall Street

Brenon Daly

Contact: Brenon Daly

Wall Street’s vote on NetApp’s purchase of the Engenio division from LSI is pretty clear: the seller got the better end of the deal. On an otherwise tough day on the market Thursday, LSI shares were one of the rare spots of green on trading screens as investors backed the company’s move to focus more on its chips business. The stock closed up 3%, with volume was more than twice as heavy as average. On the other side, NetApp slumped 6% on trading that was four times heavier than a typical day.

The reaction comes after LSI, advised by Goldman Sachs, announced plans after the closing bell Wednesday to sell its Engenio external storage systems business to NetApp for $480m in cash. (Over the past decade, LSI had several plans to spin off that unit in an IPO, but never managed to get it done.) The deal, which is expected to close within 60 days, continues a run of divestitures that LSI has undergone, including shedding divisions serving mobility and consumer products.

We would note that Engenio is garnering a valuation of just 0.7 times sales, a smidge below the more typical 1x sales seen in many divestitures. (For instance, when LSI shed its mobility products unit in mid-2007, that business garnered 1.2x trailing sales.) Still, the discount doesn’t seem to have mattered to Wall Street.

Big Data means Big Dollars for VCs

Brenon Daly

Contact: Brenon Daly

Just since last summer, the data-warehousing industry has seen a wave of consolidation sweep most of the sizable startups into the portfolios of larger vendors. While dramatically reshaping the industry, the concentrated dealmaking has also generated outsized returns for venture firms that have put money into some of the startups that are tackling the problems of ‘big data.’ By our calculation, the four recent data-warehousing exits – on average – have been 10-baggers for their backers.

The eight-month M&A spree started last July, when EMC reached for Greenplum. Two months later it was IBM’s turn to take out Netezza, the sole data-warehousing startup that had actually made it to the public market in recent years. In mid-February, Hewlett-Packard reversed its long-held strategy to stay with internal data-warehousing development and gobbled up Vertica Systems. And then just last week, the granddaddy of the industry, Teradata, snagged Aster Data Systems.

This run of deals has been a welcome development for venture capitalists, who have been starved recently for moneymaking exits. Consider this: the quartet of data-warehousing startups that have been snapped up have returned some $2.5bn to their investors, an astonishing 10 times the $245m that they collectively raised. (The total funding for the startups comes from The 451 M&A KnowledgeBase, which recently added venture information to many of the deal records.) Taking a dime and turning it into a dollar is a pretty nifty trick – and it’s one that most VCs haven’t been able to pull off across any sector of enterprise IT in a long, long time.

Select recent data-warehousing deals

Date announced Acquirer Target Price VC raised by target
March 3, 2011 Teradata Aster Data Systems $295m $57m
February 14, 2011 HP Vertica Systems $275m* (excluding earnout) $25m
September 20, 2010 IBM Netezza $1.8bn $73m
July 6, 2010 EMC Greenplum $400m* $90m

Source: The 451 M&A KnowledgeBase *451 Group estimate