Author: Brenon Daly

Sourcefire’s risky bet to re-spark its M&A program

Brenon Daly

Contact: Brenon Daly

As deals go, Sourcefire’s first acquisition hardly set the world on fire (if you will). Back in August 2007, the open source security vendor picked up the open source ClamAV project. The deal only set Sourcefire back $3.5m, but not much has been heard from the project since the acquisition. Undeterred, Sourcefire stepped back into the M&A market on Wednesday with an even larger – and (potentially) much more significant – transaction.

Sourcefire is paying $17m in cash for Immunet, a cloud-based anti-malware provider. (Immunet could also pocket a $4m earnout, which depends on the company hitting some product milestones, as well as a smidge of Sourcefire equity.) It’s still early days for Immunet, which raised just one round of funding and only started generating revenue last year. (The company claims some 750,000 users, but we suspect that the vast majority of those would be using Immunet Protect, which is available for free.)

There’s always a risk when a company reaches for an early-stage startup like Immunet, which has yet to really prove itself commercially. That risk is somewhat mitigated, however, by the fact that the two companies had worked together for almost a year, and all of the Immunet employees, including the founders, will be joining Sourcefire.

But, as my colleague Andrew Hay notes in his report, the deal brings a much bigger risk: Can Sourcefire, which is primarily focused on network security with its well-known Snort product, step into the endpoint security market without a stumble? How will it fare in selling antivirus against giant rivals that generate more revenue each quarter than Sourcefire has in its entire history? Sourcefire has fought through some tough setbacks in its history, including a broken sale to Check Point Software and breaking issue in its IPO. Now, with Immunet, it needs to show that it can actually pull off an acquisition.

Qatalyst strikes again, but bigger

Brenon Daly

Contact: Brenon Daly

When Jason DiLullo joined Qatalyst Partners last April, the boutique firm announced that he would play a major role in expanding the firm into semiconductor deals. Indeed he did. Qatalyst is getting sole credit for advising Atheros Communications on its sale to Qualcomm, the largest chip acquisition in four years. (On the other side, Goldman Sachs and Barclays Capital advised Qualcomm.) With an equity value of $3.6bn, it is Qatalyst’s largest deal – by about $1bn, no less – since it opened its doors in March 2008.

The chip deal brings the total value of the 10 transactions that Qatalyst has worked on to more than $17bn. Of course, the firm is primarily known for its role in helping to consolidate the storage sector, working on the sales of Isilon Systems and 3PAR last year, as well as Data Domain in mid-2009. (All three of those companies were erased from the market at their highest-ever valuation.) Collectively, the equity value of those three storage deals is about $7bn – ‘only’ twice the amount of Qatalyst’s sole chip deal.

The IPO pipeline just got even drier

Brenon Daly

Contact: Brenon Daly

Scratch another company off the list of potential IPO candidates for 2011. Managed security services provider (MSSP) SecureWorks got snapped up by Dell on Tuesday for what we understand was a table-clearing bid. (Subscribers can see our full report on the transaction, including our estimated price for SecureWorks.)

The trade sale comes two years after the MSSP was putting the final touches on its prospectus. That offering, which got derailed when the Credit Crisis knocked the equity markets for a loop, was set to be led by Merrill Lynch and Deutsche Bank. (Merrill Lynch, which got picked up by Bank of America later in 2008, got the print on the sale.) We understand that SecureWorks was getting ready to dust off the prospectus, update the numbers and (finally) get it on file with the SEC later this year.

Instead, Dell moved quickly to secure the deal, which will serve as the foundation for its security offering. We gather that talks only really got going after Thanksgiving, going exclusive almost immediately. And Dell had to pay up for that. Of course, Dell could consider its pickup of SecureWorks a bargain, compared to the last dual-track company it acquired. Recall that Dell paid an eye-popping $1.4bn, or 10 times trailing sales, for EqualLogic back in November 2007. The storage vendor, which had formally put in its prospectus, generated almost exactly the same amount of revenue as SecureWorks.

Big is back (sort of)

Brenon Daly

Contact: Brenon Daly

The number of big-ticket deals in 2010 jumped by one-quarter from the level posted in each of the past two years, an indication that buyers are once again open to a bit more risk. We tallied 40 transactions valued at $1bn or more last year, up from 32 in 2009 and 33 in 2008. One of the reasons for the rise in 2010 – unlike the two previous years – is that the acquirers had to top a pretty bullish tech market to secure their deals. Companies including Isilon Systems, Netezza, ArcSight and 3PAR all got taken off the board last year at their highest-ever valuation.

Also unlike the two previous years, we had a number of ‘serial shoppers’ on the list. Hewlett-Packard inked three 10-digit deals in 2010, while IBM and Intel each closed two of the big transactions as well. And it wasn’t just strategic buyers. The Carlyle Group announced a pair of billion-dollar acquisitions – on back-to-back days, no less. Overall, buyout shops accounted for seven deals last year valued at more than $1bn, up from four in 2008 and five in 2009.

10-digit transactions

Year Number of deals worth $1bn+
2010 40
2009 32
2008 33
2007 79
2006 74
2005 70

Source: The 451 M&A KnowledgeBase

2010: not the year it could have been for tech M&A

Brenon Daly

Contact: Brenon Daly

Looking back on dealmaking in 2010, it strikes us that it wasn’t the year that it could have been. With the recession (officially) behind us and many tech companies’ stock prices and cash hoards hitting record levels, we might have thought M&A last year would rebound to pre-Credit Crisis levels. That wasn’t the case.

In 2010, we tallied some 3,200 transactions – a slight 7% increase over the number of deals in the recession-wracked years of 2008 and 2009. In the far more important measure of tech M&A spending, the $178bn in 2010 represented a substantial 21% jump from 2009 levels. But it’s just half the annual amount we saw from 2005-2008. (In fact, the spending in the second quarter of 2007 alone eclipsed the full-year total for 2010.)

Looking deeper at last year’s activity of some of the key tech corporate buyers, we begin to see a partial reason for the muted overall spending, at least compared to pre-Crisis years. Yes, stalwarts like IBM and Hewlett-Packard continued their shopping sprees in 2010. Collectively, that pair announced 23 transactions worth a total of $11.1bn. But other tech bellwethers weren’t so quick to sign deals last year.

Microsoft announced just two purchases in 2010. Symantec sat out the entire second half of 2010 – a period, we might note, that saw its largest rival, McAfee, get snapped up. Cisco Systems did fewer deals in 2010 than in 2009. Included in the list of 2009 transactions for the networking giant were a pair of $3bn acquisitions (Starent Networks and Tandberg), while the largest deal Cisco announced last year was the $99m pickup of CoreOptics.

And although Dell was in the news often for M&A last year, both on successful and unsuccessful transactions, its overall activity basically kept pace with recent years. However, the company’s landmark purchase of 2010 (the $960m acquisition of Compellent Technologies) only ranks as the third-largest deal Dell has made since it jump-started its M&A program in mid-2007.

Tech bankers see a bit more of everything in 2011

Brenon Daly

Contact: Brenon Daly

As we all know, banking is a cyclical business. And after a painfully sharp downturn in recent years, the business is swinging back. It looks to be swinging even higher in 2011, according to our annual survey of many of the top dealmakers. (See our full report on the results.) We would note, too, that the rebound is expected for both the tech M&A market as well as the tech banking industry itself.

Consider this: Four out of five tech investment bankers said their pipeline appears fuller now than it did a year ago, up from two-thirds of them who said the same thing in our previous year’s survey. If we flip it around, just one out of 20 bankers (7%) said the pipeline is drier than it was a year ago, down from one out of five (20%) who said the same thing in the previous survey. The recovery is even more pronounced when we consider that in our 2008 survey, more than half of the bankers said they had fewer mandates in the pipeline than they did the prior year.

Meanwhile, concerning the tech banking business itself, respondents indicated that their firms expect to be hiring more in the next six months. They also reported that deals were closing more quickly and fee rates on the transactions were actually ticking higher.

Teradata pays a tidy premium for Aprimo

Brenon Daly

Contact: Brenon Daly

Announcing its first major acquisition since it was spun off into a stand-alone company more than three years ago, Teradata said it will pay $525m in cash for Aprimo. The deal marks a significant bet by the data-warehousing giant on the application market. Specifically, Aprimo brings a marketing automation offering to run on top of Teradata’s existing business analytics offering. Aprimo products will continue to be marketed and sold under the company’s name once the transaction closes, which is expected in the first quarter.

According to a conference call discussing the acquisition, Aprimo is expected to generate about $80m in annual sales. (We understand that roughly $60m of that is recurring revenue.) That means Teradata is paying a healthy 6.5 times revenue for Aprimo. That’s slightly ahead of the valuation that IBM paid in its big marketing automation play four months ago. Big Blue handed over $523m in cash for Unica, valuing the publicly traded company at 4.8 times trailing revenue.

Part of Aprimo’s premium could likely be attributed to the fact that it was steadily moving its business from a license model to a subscription basis. In fact, Aprimo’s SaaS offering accounted for a majority of its revenue. IBM’s move was important in the Aprimo process, as we gather that Teradata and Aprimo started talking only after Big Blue had closed its acquisition.

And the Golden Tombstone goes to …

Brenon Daly

Contact: Brenon Daly

In addition to asking corporate development executives in our annual survey to look ahead and predict M&A activity and valuations in the coming year, we also asked them to look back and tell us which deal of the previous year they thought was the most significant. The winner for 2010? Intel’s $7.7bn purchase of McAfee, an unexpected transaction that landed the largest stand-alone security company inside the dominant supplier of microprocessors. At nearly twice the value of the previous largest security deal, it’s a risky bet that security will become another integral consideration around silicon, along with power consumption and performance.

The landmark Intel-McAfee pairing barely edged out Hewlett-Packard’s contested acquisition of high-end storage vendor 3PAR in the voting by corporate development executives for the Golden Tombstone for the top deal of the year. Past winners of the highly coveted award include Oracle-Sun Microsystems (2009), HP-EDS (2008) and Citrix-XenSource (2007).

We suspect that the competition for next year’s Golden Tombstone may be even more intense, at least according to one indication in our survey. (See our full report on the survey.) When we asked corporate development executives about how likely they were to do ‘transformative acquisitions,’ more than half (52%) said they planned to do one of these risky, bet-the-company kind of transactions. In our 2009 survey, just one out of five respondents said that.

A less-than-bullish outlook for corporate shopping

Brenon Daly

Contact: Brenon Daly

The results of our annual survey of corporate development executives are in and the outlook for technology M&A in the coming year is less than bullish. Consider this change in sentiment: the number of respondents who thought the overall M&A market would improve in the coming year dropped from half (52%) in the 2009 survey to just one-third (35%) this time. Meanwhile, the percentage that projected the market will be worse tripled from just 7% last year to 23% this year. The fact that roughly one out of four corporate buyers expects the market to deteriorate is a rather bearish sign, we would suggest.

Moreover, that bearishness around the overall market carries over to projections about their own company’s buying plans for 2011. Just half (52%) said they expected to be busier in 2011 than this year. That’s down from two-thirds (68%) who said the same thing last year. (In 2009, 15% of respondents said the acquisition pace at their firms would ‘increase significantly,’ twice the level that said the same thing in this year’s survey.) See our full report on the outlook for M&A activity and valuations in the coming year from corporate development executives.

Secondaries are primary for recent IPOs

Brenon Daly

Contact: Brenon Daly

The IPO window may be slammed shut right now, but the few tech companies that have managed to make it public have found the window wide open when it comes to selling more shares. In the past week or so, QlikTech, RealPage and IntraLinks have all priced their secondary sales. All three companies only came public last summer and have had strong runs since their debuts.

Recall that QlikTech priced its IPO above the expected range, something of a rarity in the current climate. After coming public in mid-July at $10, the stock traded above $20 two months later and has held that level. Shares in the analytics company closed at $23.79 on Tuesday. Incidentally, the company didn’t sell any shares in the offering. Instead, the three main backers (Accel Partners, Jerusalem Venture Partners and Stiftelsen Industrifonden) are all lightening their holdings in the 11.5-million-share secondary.

Meanwhile, rental property software provider RealPage put in the paperwork for its follow-on offering just three months after first selling shares to the public. The company sold four million shares, raising about $98m. Another 6.35 million shares came from selling shareholders, notably Apax Partners. Although RealPage initially came public below its expected range at $11, the shares have traded at twice that level since mid-October. RealPage closed Tuesday at $27.90, giving the company a market cap of about $1.8bn.

And IntraLinks priced its 10-million-share offering at $20 each. That’s up substantially from the $13 that the on-demand document management company first sold shares to the public back in early August. IntraLinks is selling two million shares, with the remaining eight million coming from its backers. The stock closed Tuesday at $19.16.