Author: Brenon Daly

PE firm Marlin buys BIOS provider Phoenix Technologies

Brenon Daly

Contact: John Abbott

Perhaps it was inevitable. Following the firing of CEO Woody Hobbs earlier this year and the subsequent divestment of three noncore businesses, BIOS maker Phoenix Technologies has itself been acquired. Los Angeles-based private equity firm Marlin Equity Partners offered $3.85 per share, giving the proposed deal an equity value of $139m. (Phoenix held $40m of cash, giving the transaction an enterprise value of $99m). The bid represents a 27% premium over Tuesday’s closing price.

Despite its recent troubles, and the seemingly cyclical nature of its business that has resulted in regular boom and bust periods, Phoenix remains by far the independent market leader in the core systems software marketplace, in particular BIOS software, as required by all Wintel PCs. BIOS remains a vital point of control for OS and desktop management. But under pressure from Intel and open source alternatives, the company has tried on numerous occasions – without any noticeable success – to diversify. That has usually resulted in Phoenix taking its eye off the ball of its core business, which entails maintaining relationships with the big PC vendors as well as the white-box original design manufacturers (ODMs) from Taiwan.

Revenue in the third quarter declined 16% year over year to $13.7m, but Phoenix scraped together a small operating profit, its first since 2008. Ninety staff were cut during the quarter, taking the firm’s total down to 313. Future growth depends on the take-up from OEMs and ODMs of its latest product, SecureCore Tiano 2.0, which began shipping in late March. Phoenix claims 50 wins so far and is working on a further 80 projects for this design cycle. The first systems using the new version should reach the market in fiscal 2011.

Dell’s not-so-identical twin storage deals

Brenon Daly

Contact: Brenon Daly

From an investment banking perspective, both EqualLogic and 3PAR started out and finished their lives in much the same way. The two storage vendors filed to go public within a week of one another back in August 2007, and – pending the close of 3PAR’s sale – both will end up inside Dell. Yet while the final destination is the same, the two vendors’ not-so-parallel tracks to Round Rock, Texas, underscore the fact that the tech M&A market, as well as the capital markets, still have a long way to go to recover from the Credit Crisis.

Consider this: In the sale announced Monday, 3PAR garnered just half the multiple that fellow storage vendor EqualLogic got in its sale to the same buyer, at least based on one key metric. 3PAR sold for 5.6 times trailing sales, while EqualLogic went for 12x trailing sales. We would chalk up the eye-popping premium for EqualLogic mostly to the fact that Dell had to effectively outbid the public market to prevent the company from going public. More to the point, Dell had to outbid a bull market, as the Nasdaq had tacked on 20% in the year leading up to its purchase of EqualLogic in November 2007.

As any company – including 3PAR and Dell – can attest, the bull market ended abruptly and painfully just days after the EqualLogic trade sale. So now we’re left with a market where Dell can offer the highest-ever price for 3PAR shares (representing a staggering 87% premium) and still get a ‘half-off discount’ on valuation compared to its earlier billion-dollar storage deal. But then Dell knows all about discounts over that time period. The company’s market cap has been cut in half (to $25bn from $50bn) from the day it announced its EqualLogic acquisition to Monday’s announcement of the 3PAR purchase.

RainStor, the structured data retention and compression startup that recently renamed itself from Clearpace, has raised $7.5m in series B funding. The round brought in two new investors – Storm Ventures and data integration software specialist Informatica (which licenses RainStor’s technology as part of its Applimation data archive suit <!– /* Font Definitions */ @font-face {font-family:”Cambria Math”; panose-1:2 4 5 3 5 4 6 3 2 4; mso-font-charset:0; mso-generic-font-family:roman; mso-font-pitch:variable; mso-font-signature:-1610611985 1107304683 0 0 159 0;} @font-face {font-family:Calibri; panose-1:2 15 5 2 2 2 4 3 2 4; mso-font-charset:0; mso-generic-font-family:swiss; mso-font-pitch:variable; mso-font-signature:-1610611985 1073750139 0 0 159 0;} @font-face {font-family:Verdana; panose-1:2 11 6 4 3 5 4 4 2 4; mso-font-charset:0; mso-generic-font-family:swiss; mso-font-pitch:variable; mso-font-signature:536871559 0 0 0 415 0;} /* Style Definitions */ p.MsoNormal, li.MsoNormal, div.MsoNormal {mso-style-unhide:no; mso-style-qformat:yes; mso-style-parent:””; margin:0in; margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:12.0pt; font-family:”Times New Roman”,”serif”; mso-fareast-font-family:Calibri; mso-fareast-theme-font:minor-latin;} a:link, span.MsoHyperlink {mso-style-noshow:yes; mso-style-priority:99; color:blue; mso-text-animation:none; text-decoration:none; text-underline:none; text-decoration:none; text-line-through:none;} a:visited, span.MsoHyperlinkFollowed {mso-style-noshow:yes; mso-style-priority:99; color:purple; mso-themecolor:followedhyperlink; text-decoration:underline; text-underline:single;} p.bodytxt02, li.bodytxt02, div.bodytxt02 {mso-style-name:body_txt_02; mso-style-unhide:no; mso-margin-top-alt:auto; margin-right:0in; mso-margin-bottom-alt:auto; margin-left:0in; mso-pagination:widow-orphan; font-size:12.0pt; font-family:”Times New Roman”,”serif”; mso-fareast-font-family:Calibri; mso-fareast-theme-font:minor-latin;} .MsoChpDefault {mso-style-type:export-only; mso-default-props:yes; font-size:10.0pt; mso-ansi-font-size:10.0pt; mso-bidi-font-size:10.0pt;} @page WordSection1 {size:8.5in 11.0in; margin:1.0in 1.0in 1.0in 1.0in; mso-header-margin:.5in; mso-footer-margin:.5in; mso-paper-source:0;} div.WordSection1 {page:WordSection1;} –>
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by Brenon Daly

From an investment banking perspective, both EqualLogic and 3PAR started out and finished their lives in much the same way. The two storage vendors filed to go public within a week of one another back in August 2007, and – pending the close of 3PAR’s sale – both will end up inside Dell. Yet while the final destination is the same, the two vendors’ not-so-parallel tracks to Round Rock, Texas, underscore the fact that the tech M&A market, as well as the capital markets, still have a long way to go to recover from the Credit Crisis.

Consider this: In the sale announced Monday, 3PAR garnered just half the multiple that fellow storage vendor EqualLogic got in its sale to the same buyer, at least based on one key metric. 3PAR sold for 5.6 times trailing sales, while EqualLogic went for 12x trailing sales. We would chalk up the eye-popping premium for EqualLogic mostly to the fact that Dell had to effectively outbid the public market to prevent the company from going public. More to the point, Dell had to outbid a bull market, as the Nasdaq had tacked on 20% in the year leading up to its purchase of EqualLogic in November 2007.

As any company – including 3PAR and Dell – can attest, the bull market ended abruptly and painfully just days after the EqualLogic trade sale. So now we’re left with a market where Dell can offer the highest-ever price for 3PAR shares (representing a staggering 87% premium) and still get a ‘half-off discount’ on valuation compared to its earlier billion-dollar storage deal. But then Dell knows all about discounts over that time period. The company’s market cap has been cut in half (to $25bn from $50bn) from the day it announced its EqualLogic acquisition to Monday’s announcement of the 3PAR purchase. e

A bummer of a summer

Brenon Daly

Contact: Brenon Daly

Since we’re right at the midpoint of the third quarter, we thought we’d check up on recent deal flow. (For all of the pre-decimalization Wall Street traders out there, this means that 2010 is now five-eighths in the book.) When we ran the M&A numbers for Q3 so far, we found that it’s been a bummer of a summer for dealmakers: The number of transactions from July 1 to August 15 hit a six-year low.

For the six-week summer period so far this year, the number of deals totaled just 373 transactions, only a slight 3% decline from the recent low (386 deals during the same period in 2008) but a whopping 30% drop from the recent high (530 deals during the same period in 2006). Further, the scant spending in the period so far puts the full third quarter on track to hit just the low end of the range we’ve seen since the Credit Crisis erupted. And that’s coming after a post-recession M&A spending record notched in the second quarter. (See our full Q2 report.)

There are a number of reasons for the light activity. The stock market has been weak lately, with the recent slide leaving the Nasdaq underwater for the year. So far in August, the Nasdaq has registered seven down days compared to three days when it closed in positive territory. During that same period, the uncertainty in the market – as represented by the Chicago Board Options Exchange’s Volatility Index – has moved from the low-20s to the mid-20s. Risk and uncertainty tend to work against M&A, either by prolonging negotiations or killing deals altogether.

Mid-Q3 M&A totals

Period Deal volume Deal value
July 1-Aug. 15, 2010 373 $16.2bn
July 1-Aug. 15, 2009 403 $11.9bn
July 1-Aug. 15, 2008 386 $18bn
July 1-Aug. 15, 2007 427 $35.2bn
July 1-Aug. 15, 2006 530 $55.5bn
July 1-Aug. 15, 2005 383 $37.9bn
July 1-Aug. 15, 2004 244 $10bn

Source: The 451 M&A KnowledgeBase

Do-or-die time for LANDesk divestiture

Brenon Daly

Contact: Brenon Daly

It’s do-or-die time for the LANDesk divestiture, with the period of exclusivity with the most serious bidder set to expire Friday. Buyout shop Thoma Bravo is said to be the last remaining party at the table for the systems management vendor, which Emerson Electric has been trying to shed for more than six months. The current betting is that Thoma Bravo, which has done a half-dozen deals so far this year, will not take home LANDesk.

Thoma Bravo, of course, already has a play in this market – one that it got thanks to another public company divestiture. The private equity (PE) firm picked up the IT asset management division from Macrovision (now known as Rovi) in February 2008, renaming the business Flexera Software. Flexera has since bolted on four other businesses, including the purchase of ManageSoft in May. As my colleague Dennis Callaghan has noted, the hypothetical pairing of Flexera and LANDesk would bring some overlap, but would add technology for endpoint security management, service desk, remote control, power management and application virtualization that Flexera doesn’t have on its own.

While the combination makes sense strategically, we have heard that the process is snagged financially. Several sources have indicated that the asking price for LANDesk has come down from more than $300m early in the process to $250m now. (LANDesk sold for $416m back in April 2006 to Avocent, which was subsequently acquired by Emerson.) At the current level, LANDesk would be valued at more than eight times EBITDA, according to our understanding. That might prove a little rich for Thoma Bravo.

Same old, same old at Novell?

Brenon Daly

Contact: Brenon Daly

Ever since hedge fund Elliott Associates put Novell in play five months ago, we’ve said that the company was going to be a tough sell. It’s a mixed bag of businesses, both in terms of what those businesses sell and how they perform. (Or rather, how those businesses underperform, as we were reminded by Novell’s warning earlier this week about third-quarter results. If nothing else, that kept alive Novell’s streak – it also came up short in the two quarters leading up to Elliott’s run at the company.)

Undoubtedly, Novell – an underperforming company that nonetheless found its treasury stuffed with more than $1bn of cash – offered an easy target for the gadfly investor. But having that agitation turn into an acquisition is proving much more difficult. (We recently took an in-depth look at Novell, as well as the specific business lines and which suitors might be eyeing them, in a special report.)

While the process initially attracted a number of parties, we understand that there are only three left at the table: a private equity-backed company, a UK-based PE firm and a joint bid between a publicly traded tech company and a buyout shop. It’s not clear that any of the three will actually close a deal for Novell. (The process has already run past two deadlines, we gather.) Without a deal, shares of Novell would be left to trade on the company’s own merits, which probably wouldn’t do much for shareholder value.

Novell timeline

Date Event
March 2, 2010 Elliott Associates launches unsolicited bid of $5.75 per share, or $2bn equity value
March 20, 2010 Novell board rejects Elliott’s bid, retains JP Morgan Securities to explore alternatives

Source: The 451 M&A KnowledgeBase

Strategic ardor for Arbor

Brenon Daly

Contact: Brenon Daly

In yet another sign that private equity (PE) still hasn’t recovered to the level that the buyout barons enjoyed in the halcyon days before the Credit Crisis, consider the process around Arbor Networks. The network security and monitoring vendor had many of the characteristics that would typically appeal to a PE shop: a mature company that was running at about $100m, with EBITDA margins approaching the mid-teens, according to our understanding. Along with the decent cash generation, 10-year-old Arbor was also growing, targeting about 20% expansion for 2011.

Even though some half-dozen PE firms looked at Arbor, the company ended up going to a strategic acquirer, Tektronix. (See our full report on the deal, which wasn’t the most intuitive pairing we could have come up with for Arbor. That said, as my colleague Andrew Hay notes in the report, the acquisition of Arbor gives Tektronix a way to couple its network diagnostics and management of fixed, mobile, IP and converged multiservice networks with security and threat mitigation products.)

So while the portfolio expansion certainly makes sense for Tektronix, there’s also the interesting side note that, in this case, a strategic buyer is outbidding would-be financial acquirers. Further, that’s largely without relying on so-called ‘synergies,’ or cost savings from cutting duplicative operations at the acquired company to effectively lower the valuation for a corporation. (The reason: Tektronix is basically absorbing all of Arbor, running it as a stand-alone business.) That sort of corporate dealmaking is a far cry from three years ago, when the low cost of capital sometimes allowed PE firms to outbid companies, even when a not-insignificant amount of synergies figured into the deal.

Private equity activity

Period Deal volume Deal value
Jan. 1-Aug. 10, 2010 170 $18.4bn
Jan. 1-Aug. 10, 2009 170 $3.8bn
Jan. 1-Aug. 10, 2008 158 $18.3bn
Jan. 1-Aug. 10, 2007 209 $109.7bn
Jan. 1-Aug. 10, 2006 189 $53bn

Source: The 451 M&A KnowledgeBase

Hurd to join PE herd?

Brenon Daly

Contact: Brenon Daly

With this latest scandal, it’s clear that executives at Hewlett-Packard have lost their way from the ‘HP Way.’ The fairness and mild-mannered approach that once characterized the tech giant has been replaced by a leadership that in recent years has either engaged in or condoned spying, padded expense accounts and played out their own version of Dangerous Liaisons with a former actress in soft-core movies. (Although we’ve been assured that those get-togethers were not sexual, bien sur). Where leaders of HP were once patrician, they now look paranoid; once venerable, they now look venal.

Not that such ineptness and indiscretion will necessarily hurt erstwhile executives from HP. First, it was Carly Fiorina. Despite a largely vacuous tenure that included a misguided purchase of Compaq (not to mention an even more misguided attempt to buy PricewaterhouseCoopers a decade ago), Fiorina is now as likely as not to find her way to the US Senate, representing the most populous and influential state in the union. We suspect that Fiorina’s successor – the recently dispatched Mark Hurd – will likewise land on his feet.

Our guess as to where he’ll work? Private equity (PE). If we think about it, Hurd has already shown many of the skills required to work in a buyout shop. He’s overseen acquisitions of fallen businesses of questionable relevance (3Com) and even questionable viability (Palm Inc). He’s wielded a sharp knife in the name of operational efficiency, trimming tens of thousands of workers from the HP payroll as well as services giant EDS, the $13.9bn purchase two years ago that stands as Hurd’s legacy deal.

And finally, as some critics might point out, Hurd has also demonstrated a PE-style ability to line his own pockets all the while. Despite acknowledging that he failed to live up to HP’s code of conduct – a code, incidentally, that he trumpeted – Hurd’s severance package will give him some $12m in cash plus equity compensation that could be worth twice that amount. To be fair, some of the golden parachute comes from the fact that HP shares have doubled during Hurd’s tenure. And in the end, it’s his Wall Street performance, rather than his corner office peccadilloes, that could very well find him in demand at a buyout shop.

IntraLinks limps onto the market

Brenon Daly

Contact: Brenon Daly

It turns out that the third time is not the charm for IntraLinks, at least not in terms of its initial valuation as a public company. IntraLinks cut the price for the 11 million shares it is selling to $13 each, down from the $14-16 range it had set. That means the company is raising $143m, some $22m less than it would have if it priced at the midpoint of its initial range. That’s a key consideration because unprofitable IntraLinks was counting on the IPO proceeds to help it pay down debt.

But at least it did manage to get public, unlike the times it filed back in 2000 and 2005. We recently noted how much more grown up IntraLinks looks now compared to its earlier S-1s. One kicker: when it originally filed in 2000, the company ran at negative gross margins compared to the fairly respectable 65% it notched in 2009. Although IntraLinks still isn’t printing black numbers, it’s come a long way from 2000, when it lost five times more money than it even brought in as revenue.

The weaker-than-expected pricing continues a trend that we’ve seen in most tech offerings so far this year: Motricity, Broadsoft, TeleNav, Convio and others have all priced below their range – and all of them are trading lower in the aftermarket. (The one exception to this weakness is QlikTech. The offering, which we indicated would be a hot one, priced above its range at $10, and is now trading at $15.) For its part, IntraLinks first traded at $13 and basically stuck around that level in its debut.

Shopping hard in the City of Light

Brenon Daly

Contact:  Brenon Daly

On its visit to Paris, Francisco Partners brought home more than just a miniature souvenir Eiffel Tower. In the past week, the buyout shop has announced not one but two $100m deals struck in the French capital. Francisco’s unusual double dip comes at a time when the dollar, which had been at multiyear highs against the euro earlier in 2010, has slumped in recent weeks. (We recently looked at the trade winds blowing across the Atlantic.)

For Francisco, the transactions would help restock its European holdings. The buyout shop sold Swiss chip company Numonyx to Micron Technology for $1.3bn in May. In its first deal, Francisco put forward a $100m offer for the Grass Valley Broadcast business, which is being divested by Paris-based Technicolor. (The actual Grass Valley Broadcast business operates in central California, an ocean away from The City of Light.) In probably the more interesting move, Francisco picked up a majority stake in on-demand email marketing company Emailvision. The purchase gave Emailvision, which was advised by Pacific Crest Securities, a fully diluted equity value of about $109m.

Signal Hill draws a bead on Updata

Brenon Daly

Contact: Brenon Daly

The aftershocks just keep reverberating across the tech banking landscape. Three months after Stifel Financial acquired midmarket bank Thomas Weisel Partners, another non-tech bank has used M&A to build up its tech advisory practice. On Tuesday, Signal Hill announced that it has purchased Updata Advisors, with all six of Updata’s bankers joining the Baltimore-based firm that has its roots in Alex. Brown.

The deal marks the fourth acquisition of a bank with at least one tech advisory credit so far in 2010. That compares to just six acquisitions in all of 2009. However, this year’s activity trails the massive consolidation we saw during the Wall Street turmoil of 2008, when no less than 14 banks – ranging from boutiques to multibillion-dollar financial giants – got snapped up.

Financial terms weren’t disclosed. But we understand that Updata’s partners rolled over their equity into Signal Hill and now hold a minority stake in the bank. Talks between the two sides played out rather quickly, just over the past three months or so. The firms are neighbors, and are relatively well-known along the mid-Atlantic seaboard. (To be clear, Updata Advisors – the M&A wing of Updata – will be moving under the Signal Hill brand, while the investment arm, Updata Partners, will continue doing business on its own.)

For Updata, the deal comes at a time when it has rung up a fair number of recent advisory credits. The boutique has five prints so far this year, including advising ChosenSecurity on its sale to PGP and PurchasingNet’s sale to Versata. Last year, Updata had sole buyside credit for Compuware’s $295m purchase of Gomez. Overall on our league table, Updata ranked 16th in 2009 and 10th in 2008 in terms of number of advised transactions.