Author: Brenon Daly

More than one way to market

Brenon Daly

by Brenon Daly

Apparently, UPEK really wants to be a public company. It put in its IPO paperwork back in mid-2007, only to pull it in March 2008. Unlike other former filers, however, the biometric security vendor hasn’t dusted off its S-1 in an attempt to hit the public markets. (In the past week, both Convio and GlassHouse Technologies have re-filed to go public.) Instead, UPEK wants to get on the Nasdaq by picking up a rival that already trades there.

UPEK lobbed an unsolicited offer at AuthenTec on Friday that basically envisioned consolidating the two companies, which make fingerprint sensors, into a single business. Equity ownership would be evenly divided between the two sides. For its part, AuthenTec has been a public company since mid-2007, although its shares have lost some three-quarters of their value in that time. On Monday, AuthenTec, advised by America’s Growth Capital, rejected UPEK’s ‘highly dilutive and speculative transaction.’

Cold settles in on January M&A

Brenon Daly

Contact: Brenon Daly

Much like the stock market, the M&A market opened solidly in January but petered out as the month went along. We previously noted that big-name buyers (including EMC, Oracle, Apple and Cisco Systems, among others) all kicked off 2010 with an acquisition in the first week folks were back at their desks. However, the pace of deals slowed noticeably after the initial flurry.

Overall for January, we tallied 281 transactions, totaling $4.4bn in spending. Some 62% of the deals (175 transactions) came in the first two weeks of the month, compared to just 38% (106 transactions) in the back half of the month. And although spending in the last two weeks of January outstripped the first half, the increase is entirely due to a single mammoth deal, Tyco’s $2bn purchase of Brink’s Home Security Holdings. If we subtract that consolidation play, we see that some 71% of spending took place in the first half of the month. The remaining 29% came in the last two weeks of January, when the Nasdaq recorded virtually all of its full-month decline of 4%.

After dropping into pothole, Segway gets sold

Brenon Daly

Contact: Brenon Daly

As a rule, we love novelty. And we love it even more when there’s a ridiculous amount of hype – and money – directed toward that novelty, which somehow gets portrayed as something other than a novelty. So imagine our delight when we saw recently that Segway had been sold in what smacks of a scrap sale. The scooter maker, which raked in some $176m in venture backing, announced in mid-January that a UK-based holding company had picked up the firm. No terms were revealed.

Schadenfreude aside, we have to marvel at the craziness that consumed millions of dollars and probably even more engineering hours to solve a problem that never existed. A two-wheeled mode of transportation? Well, it’s pretty hard to top the bicycle, which is arguably the most efficient transportation machine ever created in terms of energy required for motion. That’s certainly not lost on the market. Each year, some 18 million bikes are sold in the US alone, while the Segway counts the total units shipped since its rollout in 2002 at less than 50,000.

Informatica: an MDM deal of its own?

Brenon Daly

Contact: Brenon Daly

With one rumored pairing in the master data management (MDM) market still buzzing, word of another deal is beginning to circulate as well. Several sources have indicated that Informatica may have picked up Siperian and could announce the transaction as soon as Thursday, when it reports fourth-quarter results. (On that note, Wall Street analysts project that Informatica will report earnings of roughly $0.28 per share on sales of $139m, which would represent growth of 12% over the previous fourth quarter.) We would note that Siperian has relatively close ties to Informatica, and continues its OEM relationships with two companies the data integration giant previously acquired (Identity Systems and AddressDoctor).

The Informatica-Siperian chatter comes as IBM is thought to be close to announcing the purchase of fellow MDM vendor Initiate Systems. (Once an IPO hopeful, Initiate instead is rumored to be heading to Big Blue, with a deal expected to be announced in the next week or so.) According to our knowledge, Siperian is slightly less than half the size of Initiate, which we estimate finished last year with around $90m in revenue. We understand that Siperian, which now counts more than 50 enterprise customers, recently crossed into profitability.

While we couldn’t learn the exact price Informatica is paying for Siperian, it is likely to be a significant transaction for a company that typically inks deals totaling around $50m. (In the previous seven buys Informatica made since 2002, it paid between $28-85m.) In fact, one source indicated that the purchase of Siperian could be in the neighborhood of twice the size of its previous largest acquisition, its April 2008 pickup of Identity Systems. Informatica closed three deals last year.

Is IBM about to ‘initiate’ a major MDM purchase?

Brenon Daly

Contact: Brenon Daly

Although we recently noted that SAP may be considering a major master data management (MDM) move, we understand that the next buyer in the market may actually be IBM. We’ve heard from several sources that Big Blue is close to announcing an acquisition of Initiate Systems. If the deal does indeed happen, Initiate would substantially boost IBM’s offering for the healthcare industry. Despite being competitors, Initiate and IBM Global Services have been longtime partners for healthcare projects. The transaction could happen as soon as this week, we’re told. And we gather that it’ll come at a rather rich valuation for Initiate.

One of the largest stand-alone MDM vendors, Initiate filed to go public back in November 2007, but withdrew its IPO paperwork the following summer. (Goldman Sachs was lead underwriter of the planned offering.) Shortly after it pulled its prospectus, it announced a $26m funding round that included strategic investments from both EMC and Informatica. However, we hear that the biggest competition for IBM’s rumored bid for Initiate may have come from the public market.

Given the very real prospect that Initiate could reheat its plans to go public, IBM would effectively have to top the valuation that Initiate could receive in an IPO and afterward. We understand that the company was running around breakeven and likely did just shy of $90m in 2009. (That would imply mid-teens growth from the $76m in revenue that Initiate recorded in 2008.) With that dynamic at play, Initiate may well garner 4.5-5x sales in the trade sale to IBM, according to sources.

Server maker Verari resurfaces under original founder

Brenon Daly

Contact: John Abbott

We noted last month that Verari Systems had run into trouble, and to avoid bankruptcy was planning to auction off its assets under an Assignment for the Benefit of Creditors agreement. The auction, run by the Credit Management Association, duly took place earlier this month. The successful bidder was none other than an investment group led by original founder Dave Driggers, who acquired ‘substantially’ all of Verari’s corporate and intellectual property assets. The company restarts under the modified name Verari Technologies, with less than one-third of the original headcount of 235, according to our understanding.

There are very few details of the transaction, and not many indications of how the new Verari will be different from – and avoid the same fate as – the old Verari. The fact remains that it’s very hard for a small company to compete in the hardware business against giants like IBM, Hewlett-Packard and Dell. The focus this time will be on datacenter design and optimization services, modular container-based datacenters, blade-based storage and high-performance computing, the vendor said in a statement. The new company now owns all of Verari’s inventory, equipment and technologies, and will immediately start supporting the existing installed base of Verari customers.

High-profile signup David Wright, previously at EMC, took over as CEO in 2006, while Driggers stayed on as CTO. The hints are that Verari will no longer try to compete in the general-purpose server and storage markets but will instead focus on niche segments, particularly those where customers require a degree of customization and consultancy, and work more closely with other industry partners. Those partners could include Cisco, which had been working with Verari on containerized datacenters before the crash. The new Verari will also work on licensing and promoting its patented intellectual property in areas such as system packaging (including blade chassis and containers) and vertical cooling.

Talk was cheap in 2009

Brenon Daly

Contact: Brenon Daly, Thomas Rasmussen

We are currently tallying up deal credits for our annual league tables. Although we’re still a few weeks away from revealing our overall rankings of the investment banks, we have pulled out a couple of interesting trends. One observation that underscores just how brutal M&A was last year is that the premium valuation that sellers typically garnered by using an adviser got all but erased in many sectors. Overall, the numbers make it indisputably clear that 2009 was a buyer’s market.

The specific valuations vary across sectors, but the software industry stands as fairly representative of this trend. In 2007, selling companies that used an adviser garnered, on average, 3.3 times trailing 12-month (TTM) sales while selling companies that didn’t use an adviser received 2.1x TTM sales. The gulf narrowed in 2008 (2.4x TTM sales for advised deals vs. 1.9x TTM sales in transactions without advisers), and essentially disappeared last year (1.4x TTM sales for advised deals vs. 1.3x TTM sales in transactions without advisers). Again, we don’t think the trend reflects the quality or value of sell-side investment banking advice as much as it indicates how few buyers were actually in the market last year. After all, it doesn’t matter how silver-tongued investment bankers may be if they’re speaking to empty chairs around the negotiating table.

salesforce.com: All dressed up and nowhere to go

Brenon Daly

Contact: Brenon Daly, China Martens

We noted late last week that it has emerged recently that salesforce.com did indeed make an (unannounced) acquisition to help bolster its upcoming enterprise collaboration product, Chatter. The purchase of GroupSwim, which had just 30 customers, was undoubtedly a tiny one. That’s been the case in the five previous buys by salesforce.com, as well.

But now, the market is buzzing that salesforce.com may be looking to take on a larger deal. Why else would a profitable company that already has $1bn on its hands raise another $500m in an upcoming convertible offering? If that sort of reasoning worked for Occam, then it’ll work for us. All that remains, then, is to figure out where salesforce.com is going to spend that money.

It turns out that coming up with a shopping list for salesforce.com is actually a bit more complicated than it is for many other companies. For starters, the firm positions itself as a platform vendor, which means that it is designed to be open and inclusive. That is exactly counter to M&A. So while it might make sense for salesforce.com to move into marketing automation (MA), for instance, by picking up Unica or Constant Contact Inc, a play like that would immediately alienate all other MA providers on AppExchange. (Currently, there are 29 different MA applications listed on AppExchange, among more than 170 applications in the broader ‘marketing’ category.)

Salesforce.com has worked around that by looking more to partner than purchase, as it did to co-create FinancialForce.com, a partnership with Unit 4 Agresso. Clearly, salesforce.com could afford to buy Unit 4 Agresso outright. (The Dutch company has a market capitalization of about $650m.) We suspect that partnerships might be the approach that salesforce.com uses to cover human capital management (HCM). A number of rumors have tied the CRM giant to either of the big HCM players, Taleo or SuccessFactors. (As an aside, we might be willing to pay money to listen to any M&A negotiations between salesforce.com’s laidback, New Age-y chief executive Marc Benioff and the blunt-talking, hard-driving CEO at SuccessFactors, Lars Dalgaard. We can only imagine the look on Dalgaard’s face if Benioff invited him to sit zazen, which wouldn’t be out of character for the salesforce.com honcho.)

So having scratched most names, what’s one company that we could imagine salesforce.com reaching for? InContact. The acquisition would boost salesforce.com’s Service Cloud, taking the firm even deeper into the call center. The (hypothetical) deal would fit nicely with InStranet, which salesforce.com acquired in mid-2008 for $31.5m, and would hardly break the bank. InContact has a market capitalization of merely $90m. And as a final bonus, salesforce.com would finally be able to shed its limited ticker ‘CRM’ in favor of the bigger, more encompassing ticker of ‘SAAS,’ which is what inContact currently trades under.

Cadbury gets sweet deal; Yahoo sours

Brenon Daly

Contact: Brenon Daly

When Kraft Foods first launched its bid for Cadbury four months ago, we termed the offer ‘an Old Economy rendition’ of Microsoft’s reach for Yahoo in early 2008. And while it wasn’t a direct parallel, there were a number of similarities: A diversified, dividend-paying company makes an unsolicited play for a target that’s only just into a restructuring program, with a goal of bolstering a business where it’s currently an also-ran.

The parallels diverged even wider on Tuesday, as the British confectioner agreed to a raised bid from Kraft. Cadbury shareholders will pocket $19.5bn in cash and Kraft stock for their company, about 11% higher than Kraft initially offered. It represents the highest-ever price for Cadbury stock on the London Stock Exchange.

So that’s the reward to shareholders from a selling company. What about on the other side? What’s happened to the owners of Yahoo since the Internet giant spurned the advances of Microsoft (as Cadbury once dismissed the interest of Kraft)? Shares of Yahoo currently trade at just half the level that Microsoft bid for them. And it isn’t just the fact that shares got hit by the biggest economic upheaval since the Great Depression since Yahoo turned down Microsoft’s interest. In the nearly two years since that decision, the Nasdaq has basically flat-lined while Yahoo stock has dropped by one-third.

A short-lived bid for Chordiant

Brenon Daly

Contact: Brenon Daly

In many ways, CDC Software’s unsolicited bid for Chordiant Software was over before it even began. As it was, the end became official late Thursday, as CDC Software pulled its $105m cash-and-stock offer for the money-losing CRM vendor just a week after floating it. It was clear that the hastily assembled ‘proactive offer’ (as CDC Software referred to it) was never going to get very far with Chordiant. Shares of the company spent virtually all summer above CDC Software’s bid of $3.46, which reflected a scant 14% premium over the closing of Chordiant shares in the previous session.

Chordiant, advised by Morgan Stanley, brushed aside CDC Software’s proposal with the ever-popular dismissal that the bid ‘significantly undervalues’ the company. (CDC Software didn’t retain an adviser, we understand.) Chordiant’s rebuff, combined with the poison pill it has in place, effectively killed the deal. CDC Software pretty much acknowledged that earlier this week when it announced that it intended to unwind its tiny 1.3% stake in Chordiant, which totaled just less than 400,000 shares. Incidentally, speaking of shares, although Chordiant stock dipped a bit when CDC Software pulled its offer, it was still closed above the bid price on Friday.