Author: Brenon Daly

Peer 1 in hosting hookup

Brenon Daly

by Brenon Daly, Philbert Shih

In what was pretty much a straight customer acquisition play, Canadian hosting provider PEER 1 Hosting said Thursday that it has picked up Atlanta-based VIA Net.Works USA. Although terms were not disclosed, the purchase of VIA Net.Works, which had $2m in trailing revenue, is almost certainly in the low single digits of millions of dollars. With the deal, PEER 1 has acquired just under 200 dedicated and managed hosting customers, which generate about 80% of total revenue. The remaining 20% of revenue comes through a base of shared hosting customers. PEER 1 has not yet decided what to do with these customers, but it is a good bet that they will be sold. VIA Net.Works’ customer base consists of SMBs that are basically all hosted on the Windows platform, although VIA Net.Works does support Linux.

The deal continues a relatively healthy flow of transactions in the hosted/managed services market. While overall tech M&A spending last year dropped by half, both the number and value of deals in the hosted/managed services sector actually ticked up in 2009. We saw some 83 deals worth $2.1bn in 2009, up from 77 deals worth $1.6bn in 2008. The pace picked up throughout the year, with two-thirds of the transactions announced in the second half of 2009. We recently published a summary of a Tier1 Research report on M&A activity in the sector. To purchase a copy of that report, click here.

M&A activity in the hosted/managed services market

Year Deal volume Deal value
2009 83 $2.1bn
2008 77 $1.6bn
2007 84 $2.7bn
2006 88 $1.9bn

Source: The 451 M&A KnowledgeBase

Wayfinder finds its way to a decent exit

Brenon Daly

Contact: Brenon Daly

Even in write-offs, it’s not impossible for companies to come out ahead. That’s what we were thinking when we saw the news that Vodafone pulled the shutter down on the Wayfinder Systems business that it acquired a little more than a year ago. Of course, in the year since the second-largest wireless operator picked up the turn-by-turn navigation vendor, a lot has changed in that market. Most notable, it’s gone from a paid service to a free offering, thanks to Google and, more recently, Nokia.

That development has erased hundreds of millions in market cap from the two main suppliers of traditional navigation devices, Garmin and TomTom, and turned them into laggards on Wall Street. (Since Google announced in late October that it was adding free turn-by-turn navigation to a small number of Android devices, Garmin stock has shed 5% and TomTom has flat-lined, while the Nasdaq has posted a 12% gain.) Given the pressure that’s been felt by those two giants – both of which garner more than $1bn in annual revenue – we have to wonder if Wayfinder isn’t pretty content with selling the business back in December 2008.

It isn’t hard to see a scenario in which a tiny company ($14m in trailing revenue) that traded on an obscure stock exchange (the Nordic Growth Market) would have been deeply wounded – even fatally so – by the commoditization of its business. (That’s what happened to Nav4All, for instance.) Instead, Wayfinder managed to sell the business for about $30m, representing a 200% premium and a decent valuation of two times trailing sales. The alternative strikes us as pretty bleak. Had it not done the deal, Wayfinder could very well have been in the process of winding itself down. As it was, Vodafone wound it down, but at least Wayfinder and its backers pocketed a bit of money before that.

A rebound, but still short

Brenon Daly

Contact: Brenon Daly

Chordiant Software’s $161.5m sale to Pegasystems, which was announced on Monday and is expected to close next quarter, marks the 10th time this year that a company listed on the NYSE or Nasdaq has been set up to be erased from one of the exchanges. Granted, not all of the announced deals will get closed (Upek’s unsolicited bid for publicly traded rival AuthenTec comes to mind), and not all of the bids will play out smoothly (the hedge fund agitation against Novell, for instance), but it does indicate a rebound in activity from this time last year.

With the recession crippling the economy in early 2009, stock prices for many tech companies sank to their lowest level in more than a half-decade. (The Nasdaq bottomed out in early March 2009 at just under 1,300. The index closed Monday at 2,362 – some 80% higher than it was a little over a year ago.) In the first few months of 2009, few companies were in the mood to talk M&A. Buyers were worried about their own outlook, and figured they had enough risk in their own operations without compounding that with a big buy. On the other side of the table, few sellers were willing to part with their businesses at what they considered bargain prices. Consequently, deal flow dried up.

What’s interesting to note is that although the equity market has rebounded so far in 2010, we’re basically seeing the same pace of deals. There were 10 acquisitions of US-listed public companies in the first quarter of 2009 – the same number that we’ve seen so far this year. Yet spending on the deals has surged more than four-fold. Clearly, that’s an indication that buyers are more confident about the outlook for business and are willing to place larger bets on acquisitions. And while that pickup in spending has been welcome, we need to keep in mind that it’s still chump change compared to when the M&A market was more vibrant. Spending on public company deals announced so far this year ($7.5bn) is less than one-quarter the level that it was in both 2008 and 2007.

First-quarter Nasdaq/NYSE M&A activity

Period Deal volume Deal value Select transactions
Q1 2010 10 $7.5bn Elliott Associates-Novell; Pegasystems-Chordiant
Q1 2009 10 $1.8bn Autonomy Corp-Interwoven; Exar-Hifn
Q1 2008 19 $34.3bn Oracle-BEA Systems; BMC-BladeLogic
Q1 2007 21 $33.3bn Oracle-Hyperion; Cisco-WebEx

Source: The 451 M&A KnowledgeBase

Chordiant hits the bid

Brenon Daly

Contact: Brenon Daly

When Chordiant Software received an unsolicited offer from CDC Software in early January, we were pretty certain that deal had roughly 0% chance of getting done. We noted that Chordiant had a poison pill in place that would make it extremely difficult – and time-consuming – for CDC to finalize the deal. Since a quick close was one of the key concerns for CDC in its bid for Chordiant, we weren’t at all surprised to see the serial buyer pull its cash-and-stock offer just a week after floating it.

In addition to the timing, there was also the consideration that Chordiant shares traded above CDC’s offer the entire time it was out there. (In this case, investors agreed with Chordiant’s contention that the bid ‘undervalued’ the company.) That meant CDC would most likely have to reach a little deeper into its pocket to get the deal done. Although CDC indicated that it may well bump its bid, most observers expected the company to walk. (That’s just how the process played out three years ago, when CDC launched an unsolicited offer for another CRM vendor, Onyx Software, only to come away empty-handed.)

Flip the calendar ahead two months, and Chordiant (advised by Morgan Stanley) has pulled off a pretty rare trick: stiff-arming that unwelcome bid and then securing a richer payday for shareholders. (Most cases tend to look more like Yahoo, which is trading at half the level that Microsoft offered for the company two years ago. Yahoo shares have lost 20% of their value since Microsoft floated its bid, while the Nasdaq has flat-lined in that period.) And Chordiant didn’t just hold out for a nickel or a dime more for its shareholders. It got the highest price for its shares in a year and a half.

Under terms announced Monday, Pegasystems will pay $5 in cash for each share of Chordiant, for a total equity value of $161.5m. That’s 54% more than CDC thought the company was worth, and enough to get Chordiant’s board to (wisely) hit the bid from Pegasystems. Speaking of Chordiant’s board, we would note that chairman Steven Springsteel, who also serves as CEO, is now four for four in terms of helping to sell the companies where he held executive roles. As we noted three and a half years ago, when we first opined that Chordiant probably wasn’t a stand-alone vendor, Springsteel had seen a trio of his previous companies get gobbled up.

Bids for Chordiant

Date Suitor Offer Equity value EV/TTM sales multiple Status
January 8, 2010 CDC Software $3.46 per share $105m 0.7x Aborted
March 15, 2010 Pegasystems $5 per share $161.5 1.4x Closing in Q2

Source: The 451 M&A KnowledgeBase

A (belated) Oscar for IBM

Brenon Daly

Contact: Brenon Daly

We hand out our version of the Oscar every year in late December. (Like the movie industry award, our Golden Tombstone is voted on by folks in the industry, which, in this case, are fellow corporate development executives.) Last year, Oracle’s drawn-out acquisition of Sun Microsystems took the top spot, while the year before, Hewlett-Packard’s multibillion-dollar purchase of services giant EDS caught the voters’ favor. But watching Christopher Waltz and Mo’Nique last night pick up best supporting actor and actress, respectively, reminded us that we neglected to award our Golden Tombstone for best supporting strategic player last year.

The winner, of course, is IBM. It did a heap of due diligence on Sun and had the acquisition nearly done before it ‘failed’ to close it (to use the words of eventual acquirer Oracle). It’s actually the second time that Big Blue has done a lot of work on a multibillion-dollar transaction only to see a rival swoop in and carry off the target. IBM had an acquisition of WebEx all but inked before Cisco wrapped up a deal for the online conferencing vendor in less than two weeks, according to our understanding.

Next to nothing for Novell

Brenon Daly

Contact: Brenon Daly

As bargains go, Novell’s valuation in the recently floated bid from a hedge fund is a bit like a ‘crazy Eddie’ discount. Earlier this week, Elliott Associates offered $5.75 for each of the roughly 350,000 shares for Novell. Altogether, the equity value totals about $2bn.

But the true cost of Novell is actually about half that amount because the company carries about $1bn in cash and short-term investments. (Don’t forget that some of that cash flowed from Novell’s good friends at Microsoft, which handed over some $350m in cash several years ago and is still buying more licenses.) So, at the current valuation, what does the $1bn buy?

Perhaps the most revealing way to look at it is that Elliott (or any other buyer, for that matter) would get more than $600m in rock-steady maintenance and subscription revenue, meaning the bid values Novell at a paltry 1.6 times maintenance/subscription revenue. And let’s be honest, that’s the most attractive asset at Novell. The business actually grew in the just-completed fiscal year, while revenue from both licenses and services declined. (License revenue plummeted 38% in the previous fiscal year, and continued to slide in the most-recent quarter, which ended January 31.)

Novell has said only that it is reviewing the bid. (It is being advised by JP Morgan Securities, which also worked with Novell on its purchase of PlateSpin two years ago. At $205m in cash, that was the largest acquisition Novell had done in a half-decade.) Meanwhile, the market has indicated that it expects Novell to go for a bit more than Elliott’s ‘crazy Eddie’ discount price. Shares have traded above $6 each since Elliott revealed its $5.75-per-share bid, changing hands at $6.07 each in mid-afternoon trading on Thursday.

Taps turned off at Liquid Computing

Brenon Daly

Contact: John Abbott

It looks like Liquid Computing will be the latest hardware startup to shut down due to a lack of funding. The former high-performance computing vendor, founded in 2003, had raised $50m of VC funding over three rounds. Its C round of $8.3m closed as recently as last summer, and was intended to fund a shift in emphasis toward ‘unified computing’ and the development work required to eliminate proprietary hardware so that the Ottawa, Canada-based company’s Liquid Elements software would run instead on industry-standard, Intel-based servers.

However, investors ATA Ventures, Axis Capital, the Business Development Bank of Canada, Export Development Canada, Newbury Ventures and VenGrowth, along with private investor (and chairman of the board) Adam Chowaniec, were apparently unwilling to put in a further funding round, despite all the activity around unified computing stirred up by Cisco Systems and Hewlett-Packard. CEO Vikram Desai and the majority of the 50 employees have left the company. Efforts are being made to sell the intellectual property, though it’s not clear who the likely buyers might be. Cisco, Dell, HP, IBM and Oracle/Sun have already set their own technical directions in this area and are unlikely to be interested.

Previous hardware-oriented startup casualties include Fabric7, Panta Systems and SiCortex – the latter lasted until June 2009 until its VCs similarly lost their nerve. And at the end of last year Verari Systems also ran out of money; its assets were acquired by founder Dave Driggers and the vendor has since reemerged as Verari Technologies. PlateSpin (acquired by Novell in February 2008 for $205m) and RLX Technologies (acquired by HP in October 2005 for an estimated $25m) were both operating in a similar area to Liquid, and all made a similar shift away from their original hardware roots over to software. Egenera and Racemi have also turned themselves into pure software providers and have so far retained their independence.

SGI: buying low and heading higher

Brenon Daly

Contact: Brenon Daly

For any company looking to be acquired by Silicon Graphics, we have this rather unorthodox suggestion for how to position the business: declare bankruptcy. We’re kidding – but only a bit. In just the past 10 months, SGI has picked up two companies in wind-down sales. Last April, server vendor Rackable Systems bought the assets of SGI in a bankruptcy sale.

When the deal closed the following month, Rackable took on the SGI name. However, since then, the company has fashioned a new and improved performance, at least in the view of Wall Street. Shares of SGI – a vendor that had gone Chapter 11 twice under its previous incarnation – are up almost 140% since the combination of Rackable and SGI closed in May. That’s more than four times the return that the Nasdaq has posted during the same period.

On a smaller scale, SGI was back bottom-feeding again last week. The company purchased assets from COPAN Systems for just $2m. As my colleague Simon Robinson pointed out in his report on the deal, COPAN had struggled to get businesses to buy into its vision of massively consolidated storage arrays for data-archiving purposes. The startup, however, didn’t have the same difficulty in getting VCs to buy into it. COPAN had raised around $110m in backing since opening its doors in 2002.

A Coremetrics sale to salesforce.com?

Brenon Daly

Contact: Brenon Daly

Could this be a case of history repeating itself? A Web analytics vendor pulls out at the last minute of a technology conference at a boutique bank, and then announces that it has agreed to a richly priced sale of the company. That’s the way it played out last fall with Omniture at ThinkEquity’s conference. And at least part of that has happened with Coremetrics this week at Pacific Crest Securities’ Emerging Technology Summit. (Coremetrics was slated to present at the event Thursday morning, but canceled its appearance, officially because the presenter was ill.)

Of course, there’s been a lot of M&A buzz around Coremetrics in recent weeks, with at least two sources indicating that the company had retained Goldman Sachs to represent it. As to who might be a buyer for the Web analytics shop, we come back to one name: salesforce.com. We understand that the CRM giant was acutely interested in Omniture and, according to some sources, was the cover bidder in that process. (Omniture, of course, ultimately sold to Adobe in a somewhat puzzling pairing.)

Coremetrics’ analytics would fit neatly with salesforce.com’s sales and marketing offering. Both are also SaaS companies. And, as we noted last month, the profitable company, which has about $1bn in cash available, has announced plans to raise another $500m in a convertible offering. Altogether, that’s plenty of cash to cover a potential purchase of Coremetrics, which would probably go for several hundred million dollars. And if the Coremetrics sale parallels the Omniture sale in that the analytics company goes to a somewhat unexpected buyer, we might put forward Autonomy Corp as a possibility, as my colleague Nick Patience did in a recent report. The acquisitive British vendor also recently announced plans to raise a slug of money.

Blue-light special on Brocade

Brenon Daly

by Brenon Daly

For all of the would-be suitors of Brocade Communications, now is seemingly the time to move on the enterprise networking vendor. The value of the company has been trimmed by about one-quarter this week, meaning that a buyer paying a typical premium would be getting Brocade for the price that it fetched on its own last week. (We understand that valuations aren’t quite that simple – and it probably shortchanges Brocade – but it’s directionally accurate.) The recent problems at Brocade stem largely from the Foundry Networks business that it acquired a little more than a year ago.

With investors lopping off the gains that Brocade had run up over the past 10 months, the company has clearly been marked down. Yet, on the other side of any theoretical deal for Brocade, the demand has probably dipped since M&A speculation was swirling around Brocade last October. The reason? One company that had been mentioned as a possible buyer for Brocade is probably now out of the market.

Hewlett-Packard made a major networking move of its own shortly after most people put it at the top of the list of potential suitors for Brocade. Last November, HP handed over some $3.1bn for 3Com, which means that it doesn’t need Brocade (or more specifically, Foundry) quite as much. Of course, IBM is still a big OEM partner for Brocade, as is Dell. Both of those vendors could still be interested in a major networking acquisition, particularly at a discounted price. Brocade currently sports an enterprise value of $3.1bn.