Author: Brenon Daly

CenturyLink continues to consolidate

Brenon Daly

Contact: Brenon Daly

Just a year and a half after a multibillion-dollar consolidation move, CenturyLink was back at it on Thursday with another one twice the size. The telecom service provider announced that it is picking up Qwest Communications in a deal valued at $22.4bn ($10.6bn in equity plus the assumption of $11.8bn in net debt). The acquisition comes just 18 months after CenturyLink, which was then known as CenturyTel, acquired Embarq Holdings in a deal valued at $11.6bn on an enterprise value basis.

When we look at the two transactions, we can’t help but notice the fact that CenturyLink is paying exactly 1.8 times trailing sales (on an enterprise value basis) for both Qwest and Embarq. (Both deals were done in equity.) For the record, we would note that’s exactly half the multiple that CenturyLink garners on the public market – and that’s without a take-over premium.

salesforce.com puts together pieces on Jigsaw

Brenon Daly

by Brenon Daly

Just three months after salesforce.com raised $575m in a convertible note offering, the CRM vendor is dipping into its treasury for the largest deal in its history. The $142m purchase price for Jigsaw Data is more money than salesforce.com spent, collectively, on its previous seven acquisitions. (Add to that, there’s a potential $14m earnout that Jigsaw could pocket.) Yet, even after it pays for this pickup, salesforce.com will still have more than $1bn in cash on hand. The transaction is expected to close this quarter.

We understand that Jigsaw finished up last year with about $18m in revenue, and salesforce.com indicated that it was expecting $17-22m in non-GAAP revenue from Jigsaw for the three quarters that the company will be on the books this fiscal year. According to our calculations, salesforce.com is valuing Jigsaw at roughly the same level that the target is currently valued by public investors, at least on one basis metric. Salesforce.com is paying about 7.9 times trailing sales for Jigsaw while its own market cap is about 8.3 times trailing sales. (Of course, shares of the on-demand CRM vendor are currently changing hands at their highest-ever level, having more than doubled over the past year.)

For Jigsaw, the sale to its longtime partner also represents a solid return for its backers, who wrote the checks that funded the company’s growth to 1.2 million members and more than 21 million contact records. Jigsaw’s three investors (El Dorado Ventures, Norwest Venture Partners and Austin Ventures) put in a total of $18m over the past six years. Strictly in terms of money in/money out, that means Jigsaw is returning almost eight times its investment. Not many startups have been able to deliver those kinds of returns recently because they’ve typically been overfunded and exit multiples have increasingly been under pressure.

PE: which door is marked ‘exit’?

Brenon Daly

by Brenon Daly, Jason Schafer

After chalking up some 17 purchases under the ownership of a private equity (PE) consortium, ViaWest has been bought by another PE firm. Oak Hill Capital Partners will pick up the 11-year-old managed hosting provider, which currently operates 16 datacenters and counts 1,000 customers. Although financial details of the transaction were not disclosed, we estimate the purchase price at around $420m. That works out to about 4.2 times trailing revenue and about 10 times cash flow for ViaWest, according to our understanding. (My colleagues at Tier1 Research estimate that roughly 70% of ViaWest’s revenue comes from its colocation business, with the remaining 30% coming from managed services.)

The deal, which should be completed this quarter, caught our eye because it is yet another recent sponsor-to-sponsor transaction that we estimate is valued in the hundreds of millions of dollars. Almost exactly two months ago, Francisco Partners flipped RedPrairie to New Mountain Capital for what we understand was roughly the same price as ViaWest. The sale of the supply chain management vendor came even though it had filed a few months before that to go public.

While there’s certainly nothing wrong with buyout shops swapping assets, it’s hardly the sign of a healthy exit environment for PE firms. Of course, there is one gigantic counterpoint to that: NXP Semiconductors, owned by Bain Capital and KKR, filed last week to sell $1.15bn worth of shares on the NYSE. The buyout tandem picked up the chip maker in 2006, when it was spun off of Royal Philips Electronics. We’re certain that a lot of fellow financial buyers, which also took home chip companies during the LBO boom in 2006-07, will be following NXP’s offering very closely.

Oracle: two deals, but more than a year apart

Brenon Daly

Contact: Brenon Daly

Exactly a year ago today, Oracle announced its unexpected $7.4bn acquisition of Sun Microsystems. If it doesn’t seem like it was that long ago, that’s because it really wasn’t. Final approval for the deal dragged on for nine full months, largely because of scrutiny by the European Commission of Oracle owning Sun’s open source database, MySQL. Eventually, Brussels agreed with our initial assessment that MySQL and Oracle rarely competed (MySQL was focused mostly on the low end of the market and on Web applications), so they cleared the transaction.

The purchase of Sun is a singular deal for Oracle. (It brings the company into the hardware game for the first time, for instance.) And it stands out even more when compared with Oracle’s pickup on Friday of Phase Forward, which is the only public company that Oracle has snagged since Sun.

For starters, the price of Phase Forward is about one-tenth the price of Sun. But more significantly, Sun was a broad, horizontal acquisition, while Phase Forward is a vertical market play. The target serves life sciences companies offering a subscription-based way to keep track of clinical trials. (It has more than 335 customers.) And perhaps most notably, parts of Sun’s technology (Sparc and Solaris, among others) will be integrated into many offerings from Oracle, which is following the strategy of other systems vendors. On the other hand, Phase Forward will be slotted into the narrowly defined Oracle Health Sciences unit.

Disconnected at Palm

Brenon Daly

Contact: Brenon Daly, Chris Hazelton

Palm Inc has lost a key set of hands. In an SEC filing Friday, the troubled company said that the head of its software and services, Michael Abbott, will be cleaning out his desk by the end of this week. (No word yet if he’ll also have to give back his smartphone.) The departure is significant because Abbott was responsible for building third-party developer support for Palm’s smartphone platform, which has lagged well behind the developer communities for Apple’s iPhone and Google’s Android OS. It also underscores one of the key problems at Palm, which we explored in more depth in a recent report.

Specifically, Palm has precious little to show for its efforts to stay relevant in the mobile world. Here’s our back-of-the-envelope math: the company will spend in the neighborhood of $300m on sales and marketing and another $200m on R&D for the current fiscal year, which ends next month. (The levels are basically annualized totals from the first three quarters of the current fiscal year.) We would also add that they are significantly higher than spending levels at rival vendors. For instance, Palm spends 2.5 times more on R&D (as a percentage of revenue) than Blackberry maker Research In Motion.

Adding together sales and marketing plus R&D spending at Palm, we get about $500m, compared to projected revenue of about $1.1bn. And what does the company have to show for that half-billion-dollar outlay? Palm’s already tiny slice of the smartphone market actually got smaller this fiscal year. And yet, despite that dismal return on investment – not to mention a key executive departure – speculation continues to swirl that Palm will get snapped up. Most often, HTC, Lenovo or even Motorola are named as suitors for Palm. However, in our report, we note key reasons why those vendors wouldn’t be interested. For our money, Dell still seems the most-logical buyer of Palm.

Juniper returns to the M&A table

Brenon Daly

Contact: Brenon Daly

After almost a half-decade out of the market, Juniper Networks is back buying. The communications equipment vendor announced plans last week to hand over ‘less than $100m’ for Ankeena Networks, its first purchase since picking up Funk Software in November 2005. The company declined to be more specific on the deal value, but at least one source indicated that the price for Ankeena was indeed less than $100m, but not by much.

Whatever its final price, Ankeena undoubtedly got a rich valuation, as it essentially launched a year ago. Sales of the company’s software for serving and managing content delivery were fairly small. Ankeena also undoubtedly delivered a rich return for its three backers: Mayfield Fund, Clearstone Venture Partners and Trinity Ventures. The trio put just $16m into Ankeena.

In the four-and-a-half years that Juniper has been sidelined, its rivals have been busy. Ericsson has inked some 17 deals in that period, including the $2.1bn acquisition of Redback Networks. Meanwhile, Cisco has sealed 39 deals in that time, spending more than $40bn. Most observers would chalk up Juniper’s M&A hiatus, at least in part, to the fact that it came up way short on its biggest gamble, the $4bn all-equity purchase of NetScreen Technologies. (On a smaller scale, Juniper also has precious little to show for its $337m cash-and-stock pickup of Peribit Networks, a WAN traffic optimization vendor that we understand was running at less than $15m in sales.)

Realizing a return on NetScreen was going to be difficult from the outset because Juniper overpaid for the security provider. In a transaction that had more than a few echoes of the Internet Bubble era, Juniper paid 14 times trailing sales and more than 50 times trailing EBITDA for NetScreen. And when it tried to make the deal work, Juniper found itself struggling to integrate NetScreen’s firewall product into its core networking line, and was unable to reconcile NetScreen’s indirect sales model with its own direct model. Maybe buying Ankeena is the clearest sign yet that Juniper, which replaced its longtime CEO in September 2008, has finally closed the NetScreen acquisition and moved on.

HP buys big

Brenon Daly

Contact: Brenon Daly

Earlier this week, Hewlett-Packard closed its $3.1bn acquisition of 3Com. It was a significant shot at the company’s new rival Cisco Systems, adding additional networking and security products to HP’s ProCurve portfolio while also dramatically increasing its business in Asia (3Com generates roughly half its sales in China). The deal was announced on November 11, and closed on Monday.

What’s interesting is that HP, which was once a fairly steady dealmaker, has been out of the market since that purchase. Its rivals, however, haven’t been on the sidelines. In the five months since HP announced the 3Com buy, IBM has inked five deals, Dell has announced two transactions and Cisco has picked up one company. Of course, some of HP’s inactivity could be chalked up to its efforts to digest 3Com, which stands as the company’s fourth-largest acquisition. (On the other side, Cisco knocked out a pair of $3bn purchases in just two weeks in the month before HP reached for 3Com.)

But we understand from a couple of different sources that although HP is looking to do fewer deals, they will be larger. The shift has actually been taking place for some time at the company. In 2007, like a number of cash-rich tech giants, HP was basically knocking out a purchase each month. That pace slowed to just five deals in 2008, including the landmark acquisition of services giant EDS. Last year, HP bought just two other companies besides 3Com. It looks like the company, which is tracking to more than $120bn in sales this year, has realized that the big get bigger by buying big.

Is third time a charm for IntraLinks?

Brenon Daly

Contact: Brenon Daly

Maybe the third time will be the charm for IntraLinks. The company, which is perhaps best known for its ‘virtual deal rooms,’ filed to go public late last week, the third time it has put in an S-1. It plans to raise $150m in the offering, which is being led by Morgan Stanley, Deutsche Bank Securities and Credit Suisse. IntraLinks had also been on file back in the Bubble Era, filing its IPO paperwork in mid-1999 only to pull it a year later, and again for a few months in late 2005.

To get a sense of just how much the company – and, by extension, Wall Street – has changed since the frothy time of the late 1990s, we went back and pulled IntraLinks’ original prospectus to compare it to the most-recent paperwork. It hardly seems like the same company.

In 1999, IntraLinks lost five times more money than it even brought in as revenue (a $21.3m net loss on just $4.1 in revenue for the year). The company even managed the highly impressive trick of running its business at a negative gross margin. The kicker on that upside-down business model is that it was actually pretty common back in the late 1990s. Plenty of companies running at even larger losses than IntraLinks made it public during that era.

Like a lot of us, IntraLinks seems positively grown up now compared to the time when companies were throwing equity around like it was funny money and stock prices only went up. It finished 2009 with $141m in revenue, meaning that it now generates more sales every two weeks than it did during the entire year that it first filed to go public. And while the vendor still hasn’t managed to hit profitability, it has narrowed its operating loss to just $3.4m last year. For the record, IntraLinks’ gross margin hit a respectable 65% in 2009, a sharp reversal from the Bubble Era, when it actually sank deeper into the red with every sale that it made.

A Double-Take takeout?

Brenon Daly

Contact: Brenon Daly

Never mind the business, somebody has their eye on Double-Take Software. The file-replication software vendor said Monday that it came up short in its first-quarter performance, continuing the struggles that it saw throughout 2009. Last year, maintenance revenue flat-lined, while license sales dropped by one-quarter. And although the first quarter is starting off a bit underwhelming, Double-Take is still projecting that it will grow this year. However, even if the company hits the high end of its estimate of $95m, sales for 2010 will still fall just short of 2008’s level of $96m.

Apparently, that lackluster performance hasn’t dimmed the company’s appeal. As Double-Take was announcing its Q1 miss, it also said – in an ‘Oh, by the way…’ manner – that it had received an ‘unsolicited, non-binding’ expression of interest from an unnamed suitor. No terms were revealed so it’s hard to know, specifically, what’s on offer to Double-Take shareholders. The company says only that the bid is ‘above recent trading prices.’ Does ‘recent’ mean a bit under $9, where shares have been since early February? Or does ‘recent’ also include the period in January when shares changed hands above $10, before the company warned (for the first time) that the quarter was coming in a bit light? On the report, Double-Take stock jumped 15% to $10.05 in Monday afternoon trading.

As to who might have floated the bid, it strikes us that this looks like a private equity (PE) play. If a strategic buyer wanted Double-Take, we don’t see it approaching the company in such a fast-and-loose way. Besides, there are basically only two companies that would make obvious bidders: Dell and Hewlett-Packard. The two tech giants are Double-Take’s main channel partners, with Dell accounting for a full 17% of the company’s revenue on its own. Also, both vendors could presumably benefit from Double-Take’s large customer base of SMBs, which numbers more than 22,000. Of course, an auction could draw out any interested strategic player, so the potential bidders aren’t necessarily limited to HP and Dell.

But as we say, we think this offer came from a buyout shop. And we can certainly understand Double-Take’s attractiveness to a financial buyer. In short, it’s cheap. Even with the stock’s pop on Monday, the company still only garners a market cap of about $220m. And the net cost is even cheaper, because the debt-free, profitable vendor carries almost $100m in cash on its balance sheet. At an enterprise value of just $120m, Double-Take is valued at less than three times its maintenance stream. That’s a valuation that any number of PE firms probably figure they could make money on.

Phoenix sheds FailSafe

Brenon Daly

Contact: John Abbott

Phoenix Technologies announced at the start of the year that it was putting its plans to expand beyond the core BIOS software business on hold, and hired GrowthPoint Technology Partners to find a buyer for its non-strategic technology assets. A short time later, CEO Woodson Hobbs was out the door, followed soon after by CFO Richard Arnold. Ironically, Hobbs was originally hired in September 2006 to turn the company around, and his first task back then was to rebuild the BIOS business after Phoenix had lost its way through diversification. It appears that Hobbs fell into the same trap by putting too much effort into HyperSpace, a hypervisor that was being positioned as the basis for an OS for netbooks. Tom Lacey, who previously worked at Applied Materials Inc and before that Flextronics, took over as CEO in February.

Now a buyer has been announced for the first of Phoenix’s unwanted assets: FailSafe, a theft-loss protection and prevention system for laptops, and the associated Freeze computer locking system. The acquirer is security tools provider Absolute Software and the price tag is $6.9m. (This is Absolute’s second acquisition in five months: last December it spent $9.6m on the assets of Pole Position Software, primarily for the target’s LANrev asset management package). Phoenix is still trying to offload HyperSpace itself as well as the eSupport.com line of online PC diagnostics tools.

Since the need for a new OS to run on netbooks now appears to be fading away, HyperSpace could conceivably be utilized by vendors addressing the desktop virtualization market. However, the largest players here – VMware, Citrix and Microsoft – are working with their own hypervisors and are unlikely to want another. Interestingly, Phoenix has filed a patent-infringement lawsuit against startup DeviceVM, the developer of the SplashTop lightweight Linux OS. DeviceVM has licensing deals in place with netbook and laptop makers Asus, Hewlett-Packard, Lenovo, LG Electronics, Acer and Sony.

New CEO Lacey claims that excellent progress is being made on refocusing Phoenix back onto its BIOS business. At the end of fiscal 2009 (ending September 30), the noncore products made up less than 10% of Phoenix’s $67.7m in revenue, an overall decline of 8% over 2008. That means core BIOS sales are back down to the same level as they were in fiscal 2006, despite the acquisition of direct rival General Software Inc in July 2008. In its most recent first quarter, the company posted revenue of $15.6m (down from $17.4m in Q1 2009) and a profit of $1.1m (including a one-off $7.1m income tax refund). Phoenix has cash on hand of $27.9m.