Author: Brenon Daly

Sources: a take-private for Double-Take

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Contact: Brenon Daly

The final bidders for Double-Take Software have narrowed to three buyout shops, and a purchase of the file-replication software vendor could be announced within the next two weeks, we have learned. The company said a month ago that an undisclosed bidder had approached it about a possible transaction.

A number of sources have pointed to Vector Capital as the unidentified suitor, adding that the firm is one of the three bidders still in the running. Although we speculated early on that Double-Take’s two main channel partners (Dell and Hewlett-Packard) might be interested, we understand now that there aren’t any strategic bidders currently at the table.

The price couldn’t immediately be learned, but we suspect there won’t be a huge premium for the company, which was trading at $9.36 on Monday afternoon. The reason? Double-Take recently trimmed its sales outlook for 2010, essentially saying it doesn’t expect to grow this year. It recently guided to about $86m in sales for 2010, about 10% lower than it had expected earlier this year. It finished the recession-wracked 2009 with revenue of $83m, down from $96m in 2008.

Even without growth, Double-Take undoubtedly holds some appeal to a private equity (PE) firm. For starters, the company is cheap. It currently sports a market capitalization of just $200m, but nearly half that amount is made of its cash and short-term investments. (The company held $89m in its treasury at the end of the first quarter.)

With an enterprise value of only $111m, Double-Take now garners just 1.3x projected sales. Another way to look at it: even with a decent premium to the company’s current valuation, a buyer could still pick up Double-Take for about 4x maintenance revenue. Small wonder that a few PE shops are still considering a Double-Take takeout.

Where might Symantec shop?

Brenon Daly

Contact: Brenon Daly

After its double-header encryption deals last week, Symantec appears set to return to M&A. Like a number of tech giants, Big Yellow largely shunned dealmaking last year. But the drop-off was particularly notable at Symantec: It spent more than $1bn on acquisitions in both 2007 and 2008, but less than $100m in 2009. We would hasten to add that in the fiscal year that just ended on April 2, Symantec generated $1.7bn in cash flow from operations. That brought its cash stash to more than $3bn.

As to where the company might be shopping, my colleague Paul Roberts in our Enterprise Security Program outlines five areas that make sense for Symantec to buy its way into – as well as who might be of interest in those markets. In a new report, Roberts looks for M&A activity from Symantec in the following areas: threat detection and reputation monitoring, SIEM and vulnerability management, enterprise rights management, database security and endpoint control. All of those areas are a long way from Symantec’s original market of antivirus software.

A final thought on Big Yellow and its possible shopping is that the company actually enjoys a fair amount of goodwill on Wall Street right now. Symantec’s fiscal fourth quarter, which it reported Wednesday, was surprisingly strong for many investors, particularly after rival McAfee had a less-than-stellar first quarter. In fact, on many trading screens Symantec was the only green stock Thursday on an otherwise blood-red day. Symantec shares closed up less than 2%, but that was on a day that saw the Dow Jones Industrial Average plummet almost 1,000 points, or 9%, in afternoon trading.

One sale leads to another at Sophos?

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Contact: Brenon Daly

As leading indicators go, the recent decisions around Sophos paint a rather bearish picture for the current IPO market. The anti-malware vendor had briefly filed to go public back in late 2007 but then pulled the paperwork as the markets tumbled. We understand that Sophos had lined up banks earlier this year for another run at an IPO, but it ended up selling a majority chunk to buyout shop Apax Partners earlier this week. (Two of the three bookrunners on the most recent lineup were the same as the 2007 prospectus, according to a source.)

A dual-track process typically adds at least a few dollars to the price of a company, since it at least introduces the idea of another buyer (the public market). However, Sophos’ sale to Apax, in our view, comes at a discount to the valuation we would have penciled out for the company. The deal values Sophos at $830m, about 3.2 times trailing sales and 2.7 times projected revenue. Sophos’ stillborn IPO comes at time when other would-be debutants are having to cut terms or shelve their offerings altogether.

Yet somewhat paradoxically, we think the move by Apax actually makes an offering by the security company more likely, at least down the road. For starters, it replaces Sophos’ somewhat cumbersome ownership structure, which didn’t always share the same alignment, with a single owner to call the shots. (For instance, we heard there was a fair amount of dissention inside Sophos over its mid-2007 purchase of Utimaco, which stands as the largest acquisition of a public security company by a private one.)

Also, Apax probably got in at a low enough price that it could make a decent return by taking Sophos public in a year or two, provided the equity markets stay receptive. (We would argue that’s a much more likely exit than a flip to yet another buyout shop.) And finally, there are plenty of banks ready to (at long last) get Sophos on the market. Many of the underwriters have been working with Sophos for more than a half-decade, so it would be just a matter of updating numbers in what has to be a well-worn pitch book.

Sophos is a seller

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Contact: Brenon Daly

Former IPO hopeful Sophos will stay private (at least for the time being), but will have a new owner, the anti-malware company said. The new majority holder is Apax Partners, having picked up a 70% stake from both TA Associates, which had been a minority shareholder since 2002, and Sophos’ two founders. The purchase put an overall price tag of $830m on Sophos.

The sale comes after much speculation that Sophos, which had filed to go public in November 2007, was once again looking for an IPO. In fall 2009, British media reports indicated Sophos was planning an offering in 2010 that would have valued the company at about $1bn. Instead, Sophos is taking what we would consider a multiple at the low end of the range, even though the company’s size and recent growth rate might imply an above-market valuation.

Sophos indicated it recorded billings of $330m and revenue of $260m for its fiscal year, which ended March 31. On a trailing basis, that works out to just 2.5 times bookings and 3.2 times sales. Assuming Sophos continued growing at a 19% rate for the current fiscal year, it would have finished this year with about $310m in sales. That means Apax is valuing Sophos at just 2.7 times projected revenue.

Other security companies that have danced on and around the public stage have recently fetched much richer valuations, at least in one key measure. Encryption vendor PGP garnered four times trailing revenue in last week’s sale to Symantec. While PGP may or may not have been planning to go public, the most recent security IPO does trade at a notable premium to the valuation Sophos just got in its sale. Unified threat management vendor Fortinet currently commands a $1.25bn market capitalization, which works out to 4.9 times trailing sales.

Equinix: Datacenter dominance

Brenon Daly

Contact: Brenon Daly, Jeff Paschke, Aleetalynn Schenesky-Stronge

Wrapping up one of the largest recent deals in the datacenter market, Equinix said Monday that it has closed its $683m purchase of rival Switch and Data. (No fewer than five banks claimed a print on the transaction.) Terms call for Equinix to hand over $134m in cash and $549m in equity. Since the deal was announced in late October, shares of Equinix have added some 4% while the Nasdaq has gained 15%.

The consolidation play by Equinix creates the largest multi-tenant datacenter provider in an otherwise extremely fragmented market. Our colleagues at Tier1 Research estimate that there are more than 350 datacenter providers in North America alone. After the combination, Equinix will control 11% of the North American colocation market, up from 8.5% on its own, according to T1R. The acquisition of Switch and Data adds 16 new metropolitan areas in North America where Equinix will now offer service, including Atlanta, Toronto, Denver, Miami and Seattle.

On its own, Equinix recorded revenue of $882m last year and analysts projected that the company would hit $1bn this year. Switch and Data bumps up the vendor’s top line by about 20%. Equinix will provide further financial details of the combination during an investor presentation on Thursday.

Double-door exits

Brenon Daly

Contact: Brenon Daly

When companies look for an exit, there is usually door number one (IPO) or door number two (trade sale). But in some rare cases, it’s not either/or, it’s both. That’s playing out in two very different ways around Symantec’s acquisition of encryption vendor PGP. The purchase by Big Yellow was the first of a doubleheader day in which it also picked up its OEM partner, GuardianEdge Technologies. (Incidentally, the PGP buy was Symantec’s largest acquisition since reaching across the Atlantic for on-demand vendor MessageLabs in October 2008.)

But back to exits. With the sale of PGP, we expect the next big liquidity event for an encryption vendor to be the IPO of SafeNet. We’ve heard recent talk of an offering for the company, which was taken private by Vector Capital in early 2007. Since its buyout, SafeNet has done a few deals of its own, including the contentious acquisition of Aladdin Knowledge Systems in August 2008. We understand that SafeNet is running at north of $400m in revenue.

The sale of PGP also means that investment firm DE Shaw has now recorded one of each potential exit over the past month. In late March, portfolio company Meru Networks went public, and now fetches a market valuation of about $250m. (The offering by Meru came after many other wireless LAN providers got snapped up.) DE Shaw also owned a chunk of PGP, meaning it will also get a payday from Symantec’s $300m purchase of the encryption vendor.

Palm’s down

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Just two weeks ago, we wrote that we thought Palm Inc would be a tough sell because the cash-burning smartphone pioneer seemed mired in irrelevance, both to consumers and developers. OK, so we were a bit off on that. The company apparently appeared relevant enough to Hewlett-Packard for the tech giant to hand over more than $1bn in cash for Palm.

While Palm’s board has backed the deal, it appears to be a bit of a tough sell to the company’s shareholders, who have bid Palm stock above the offer since it was announced. From their perspective, anyone who bought the stock over the past year – with the exception of a period from roughly mid-March to mid-April – is underwater, despite the 23% premium offered by HP. Palm shares changed hands at twice the level of HP’s bid for most of January.

But then, valuing Palm has always been tricky, going back to its fitful birth on the Nasdaq as a spin-off from 3Com. (As a side note, HP’s pending pickup of Palm would reunite the smartphone company with its former parent, as HP just closed its purchase of 3Com three weeks ago.) When the tiny stake of Palm hit the market in early 2000, investors were pushing each other out of the way to get their hands on Palm (if you will). The company finished its inaugural day on the Nasdaq at a valuation of some $50bn – roughly twice as much as Apple was worth at the time. Today, Apple fetches a market cap of $250bn, while Palm just sold for $1.4bn.

Tangoe lines up for IPO dance

Brenon Daly

Contact: Brenon Daly

Back in January 2009, Tangoe made a small acquisition on its way to what we expected would be an IPO. Of course, neither the telecom expense management (TEM) vendor nor any other company was going to make it public in the first few months of last year. But with the recovery in the capital markets, Tangoe has indeed filed for its IPO, looking to raise $75m. The 10-year-old company plans to trade under the ticker ‘TNGO’ on the Nasdaq. We expect a fairly strong offering from Tangoe, which nearly doubled sales to $37.5m in 2008, and pushed that up another 49% to $56m last year despite the recession. See our full report on the company and the planned IPO.

Tangoe focuses on lifecycle management for fixed and mobile communications and more recently mobile device management. As a TEM provider, Tangoe has more than 350 companies using its expense management tools and services. The Orange, Connecticut-based vendor has pushed into the mobile communications space with the purchases of Traq Wireless in March 2007 and InterNoded in January 2009. Traq provided wireless expense management, helping Tangoe expand its lifecycle management for mobile as customers moved more of their communications off fixed lines. Offering deeper management and monitoring of these mobile devices, InterNoded gave Tangoe the ability to provision, secure and remotely wipe devices used by its customers.

Aftershocks on the tech M&A banking landscape

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Contact: Brenon Daly

In our report on the 2009 league table, we noted that Wall Street had been rocked by an earthquake in 2008 but that the smaller aftershocks were continuing to ripple across the tech banking landscape. Another one of those was felt Monday, when Thomas Weisel Partners agreed to sell itself to a rather old-line institution, Stifel Financial, for around $300m in stock. The deal, which is slated to close this quarter, would add TWP’s investment banking business, with its focus on tech, healthcare and alternative energy, to Stifel, which is known more for its transactions involving financial institutions and real estate.

In 2008, we counted 11 acquisitions of firms involved with tech M&A, including powerhouses such as Bear Stearns, Lehman Brothers and Merrill Lynch. The number of deals in 2009 dropped, as did the size of them. There were just five purchases of investment banks with tech practices last year, including the pickup of Cowen and Co by hedge fund Ramius Capital and Raymond James & Associates’ acquisition of Lane, Berry & Co.

As we look at the league table, we’re struck by the fact that Stifel is adding a pretty busy tech advisory shop by buying TWP. (If you would like a copy of our 2009 league table report, just email me.) Last year, TWP finished tied for 12th place (with Citigroup) in terms of the number of IT transactions that it worked on. On a pro forma basis, adding Stifel’s four deals to the 10 that TWP banked would put the combined entity at 14 IT transactions, tied for fifth place.

If anything, TWP has picked up its pace this year. It has already worked on five deals worth more than $1.2bn, including sole sell-side credit on the pending $755m sale of Phase Forward to Oracle. Additionally, it’s been arguably the most-active midmarket underwriter of tech IPOs. TWP is sole bookrunner for offerings from SciQuest as well as SPS Commerce, which was one of the few IPOs last week that actually finished above water. It is also co-lead on Tangoe, which filed earlier this month, and Convio, which is slated to price this week.

A new jersey for Thomas Weisel

Brenon Daly

Contact: Brenon Daly

As a former national cycling champion, Thomas Weisel undoubtedly knows there are races where you can break away from the pack and stick a winning move all the way to the line. And then there are races where no matter how hard you try to turn the pedals, the peloton just swallows you up and drags you home to an undistinguished placing. If Weisel’s first sale of his investment bank is the former, then the sale of his namesake bank announced today is, arguably, the latter.

Back in mid-1997, Weisel sold Montgomery Securities for $1.2bn in cash and stock to NationsBank, which is now known as Bank of America. On Monday, Weisel sold Thomas Weisel Partners for just one-quarter that amount. Stifel Financial will purchase TWP for around $300m in stock. (Shares of Stifel dipped slightly on the announcement, shedding 4%.) The deal is expected to close this quarter.

To be sure, the proposed combination makes a ton of sense. It adds TWP’s investment banking business, with its focus on tech, healthcare and alternative energy, to Stifel, which is known more for its deals involving financial institutions and real estate, among other areas. Furthermore, the combined company would have research coverage on more US public companies than any other Wall Street firm. On paper, TWP brings a focus on the New Economy that Stifel has been missing, even as the St. Louis-based firm gobbled up other parts of the banking business over the past half-decade.

But for TWP and its founder, the sale probably comes up a bit short of what had been imagined when the bank opened its doors in 1999. (Of course, that’s probably true for any venture launched in that era, when all the charts went up and to the right in uninterrupted lines.) More recently, shares of TWP spent much of 2010 trading below book value. Since Wall Street was hardly willing to assign any value to the firm, the sale of TWP at an eye-popping premium of about 70% is probably not a bad exit. Who knows, maybe with the change of jersey, the ultra-competitive Thomas Weisel can get back on the podium.