Author: Brenon Daly

Long an LBO target, ACS goes to Xerox

Brenon Daly

Contact: Brenon Daly

Finally, Darwin Deason does his deal. The chairman and overwhelmingly largest shareholder of Affiliated Computer Services (ACS) has had the IT services company he founded in 1988 in play for some time now. The firm was approached by an unnamed private equity (PE) shop some four years ago, but talks were scrapped in January 2006. Then came Cerberus Capital Management, which put forward a $5.9bn bid in March 2007, only to pull it some three months later as the credit markets started tightening. Finally, on Monday, Xerox said it will buy ACS for $6.4bn in cash and stock. (Incidentally, Xerox shares were worth quite a bit less after the announcement, dropping 19% in Monday-afternoon trading.)

It’s noteworthy that a strategic acquirer has replaced PE shops as the buyer of the slow-but-steadily growing services company. We would chalk that up to the recent changes in the credit market. When debt was cheap and plentiful, buyout shops could afford to give up ‘synergies,’ knowing they could make a return because of the low cost of capital. (And the synergies can add up. Xerox expects to save $300-400m in the first three years by cutting duplicate costs and other financial advantages of the combination.) ACS has some $2.3bn in debt, which Fitch gives a ‘speculative’ rating of BB.

Although Deason stepped upstairs at ACS three years ago, he still controls some 44% of the voting stock in the company. (His outsized control in the vendor comes primarily through his ownership of all of the Class B shares of ACS, which carry 10 votes per share.) Looking at the rest of ACS’ board helps to explain at least one other part of the transaction as well, the fact that ACS was advised by Citigroup Global Markets. Longtime Citigroup executive Robert Druskin has served on the ACS board since March 2008. Additionally, Evercore Partners advised the board at ACS. On the other side, JP Morgan Securities and Blackstone Group advised Xerox.

Like Intel, Microsoft buys scraps of parallel-processing startup

Brenon Daly

Contact: John Abbott

Despite a fair bit of talk about how important it is to demystify the art of parallel programming now that multiple cores and threads have become mainstream in x86 computing platforms, the actual level of activity has been surprisingly low. Over the last few years we’ve identified no more than a dozen small development tools vendors active in this area – some of them focused on the high-performance computing (HPC) sector – that appeared to have some prospect of success. And the companies with the most at stake in seeing better performance levels from new-generation CPUs (notably Intel and Microsoft) don’t seem to have been working particularly hard on the problem, either.

Perhaps, however, that’s starting to change. True, the number of startups is declining rather than expanding, but as they fail their assets are being acquired by larger vendors. One of the first to go was PeakStream in June 2007, snagged by Google after raising $22m in VC funding. But Google had no interest in sharing what it had bought. It withdrew PeakStream’s commercial product and began using it internally to boost the performance of its own software. Just last month Intel – currently in the process or rolling out six- and eight-core microprocessors – revealed that it had quietly picked up two small companies: RapidMind and Cilk Arts. And now Microsoft has announced, equally quietly, that it has purchased the technology assets of Interactive Supercomputing (ISC).

ISC had raised around $18m in VC funding over its four years of life, from Ascent Venture Partners, CommonAngels, Flagship Ventures, Fletcher Spaght and Rock Maple Ventures. It’s perhaps a bit of a stretch to call what ISC was doing mainstream, since it was focused on the HPC market. Its Star-P development environment let users create software models on their desktops using off-the-shelf packages from which parallel code could be automatically generated. The company claimed it could cut months from software development lifecycles. But Microsoft is talking about integrating ISC’s technology into its own products and using it for desktop computing as well as clusters. ISC CEO Bill Rock will bring over a team of experts to join Microsoft’s New England Research & Development Center in Cambridge, Massachusetts. Microsoft says it will continue to support existing Star-P users but won’t continue to sell the product in its current form.

Solid-state storage market: OEM now, M&A later?

Brenon Daly

Contact: Brenon Daly

As buoyant as the Nasdaq has been so far this year, few stocks can come close to matching the stunning 10-fold rise of STEC Inc. After opening the year at about $4, shares in the maker of solid-state drives (SSDs) inched above $40 earlier this month. Perhaps inevitably, gravity (in the form of Wall Street concern over increased competition) has pulled STEC back down over the past week. Shares closed Wednesday at $30.85, leaving the company still with a cool $1.5bn market capitalization.

In a recent report, my colleague Henry Baltazar notes that STEC is the central player in the emerging SSD segment, one that could very well change the face of the multibillion-dollar server and storage markets. SSDs are much faster and far more efficient than traditional hard drives and disk-based storage arrays. Also, the prices of SSDs have come down sharply as they have moved from costly DRAM-based to flash-memory-based drives. Taken together, the pitch of ‘better, cheaper, faster’ has spurred phenomenal growth in the SSD space. For its part, STEC’s sales are projected to hit $350m in 2009, an increase of more than 50% in the midst of one of the softest IT spending environments in recent years.

This trend, of course, hasn’t gone unnoticed by the server and storage giants. So far, however, when these companies have run the ‘buy-build-partner’ calculus for the SSD sector, most have opted to partner. STEC, for instance, has OEM deals in place with nearly all of the major server and storage players, including IBM, Hewlett-Packard and a longstanding accord with EMC. As mentioned, though, competition is heating up as startups look to get established in this fast-growing market. New companies entering the space include Pliant Technology and SandForce (neither of which has announced any OEM agreements of its own so far), plus Fusion-io, which has OEM deals with HP and IBM, as well as reseller agreements with Dell and other vendors. If the SSD market continues to take off, we could certainly imagine one or more of these startups getting snapped up.

Correlated markets?

Brenon Daly

Contact: Brenon Daly

To look at the recent performance of the Nasdaq, you’d hardly know that capitalism (as we know it) almost died a year ago. The tech-heavy index was largely unchanged on Wednesday but has posted gains for three straight sessions, having added 9% so far in September. That’s part of a longer run that has seen the Nasdaq tack on 35% since the beginning of 2009 and 70% since bottoming out in early March. In fact, the index is essentially where it was a year ago, before banks started going under, the credit market froze and the US government fired up its printing presses to give us all enough money to buy our way out of the recession.

The optimism that’s been boosting the equity markets is starting to carry over to the M&A market, with several signs from big-time buyers pointing to a return to health:

  • Dell’s recent reach for Perot Systems stands as the largest tech transaction in five months.
  • Google inked its second acquisition in as many months, after being out of the market for nearly a year. (The search giant added reCAPTCHA last week after picking up On2 Technologies in early August, its first purchase of a fellow public company.)
  • Adobe and CA Inc announced their largest deals in four-and-a-half years and three-and-a-half years, respectively, in the past week.
  • Microsoft grabbed a bucketful of small companies to add technology to its ERP division, a business that has largely been shaped by a pair of billion-dollar buys earlier this decade.

Of course, we need to consider this resurgence of deal flow in the context of an overall sluggish M&A market. With a week and a half left in the third quarter, spending on deals is running at just $28bn. While that would put activity roughly on par with where it was last year, it is only half of the amount of third-quarter spending in 2007 and one-third of the total in Q3 2006. Another way to look at it: the roughly $84bn that we’ve seen so far for all of 2009 is basically what we used to see in a single quarter during the boom years.

Q3 tech M&A activity

Period Deal volume Deal value
Q3 2009 (through August 22) 672 $27bn
Q3 2008 733 $32bn
Q3 2007 825 $58bn
Q3 2006 1,029 $102bn
Q3 2005 811 $87bn

Source: The 451 M&A KnowledgeBase

Goldman regains its Midas touch

Brenon Daly

Contact: Brenon Daly

Goldman Sachs is having a September to remember, after an uncharacteristically quiet run throughout 2009. We noted in our mid-year league table report that Goldman, which topped our annual rankings 2005-07, had slipped to a distant seventh place in the first half of this year. Since the beginning of September, however, the bank has regained its Midas touch.

Goldman has worked on four tech deals announced so far this month, with a total equity value of $7.9bn. (The September spending accounts for some 60% of the value of all deals that Goldman has advised on so far this year.) The transactions: sole advisor to eBay on its $2bn Skype divestiture; advisor to Intuit on its $170m purchase of Mint; sole advisor to Adobe on its $1.8bn acquisition of Omniture; and sole advisor to Perot Systems in its (relatively richly priced) $3.9bn sale to Dell, which stands as the largest tech transaction in five months.

By way of a final thought on Goldman’s return, we’d note the unusual situation that popped up in the buy-side deals that Goldman worked last week. We can’t recall the last time we saw any bulge-bracket bank get a print one day (Intuit’s purchase of Mint) and then turn around the very next day and get a print that’s 10 times larger (Adobe’s purchase of Omniture).

Dell-Perot Systems: an expensive Texas tie-up

Brenon Daly

By Brenon Daly

To understand just how richly Dell’s bid values Perot Systems, consider this: the last time shares in the services company traded at the level Dell is paying, Dell’s own long-slumping stock was changing hands above $40. That was back in early 1999, just after Perot Systems went public. (As a side note on the IPO, five banks are listed on the prospectus; Goldman, Sachs, which advised Perot in Monday’s sale to Dell, is not one of them.) By early 2000, shares of Perot had dropped to below $20, and never again pierced the $20 level, much less the $30 for each share that Dell is handing over in its proposed $3.9bn purchase.

The offer means Dell is paying a price for Perot that the company hasn’t seen on its own in a decade. Put in numbers, Dell’s bid values Perot at 68% above the closing price in the previous session, and some 78% higher than the average price of shares over the prior 30 trading days. For its part, Dell stock was bouncing around $16 on Monday, having dipped about 4% on the announcement.

And when compared to a similar move by a hardware vendor to bolster its services arm, Dell’s planned purchase of Perot comes in at about twice as expensive as Hewlett-Packard’s $13.9bn reach for EDS in May 2008. Dell is paying 1.4 times trailing 12-month (TTM) revenue and 12.9 times TTM EBITDA for Perot. That compares to HP’s acquisition, which valued EDS at 0.6 times TTM sales and 5.7 times TTM EBITDA.

‘What’s up with Omniture?’

Brenon Daly

Contact: Brenon Daly

It wasn’t quite shouting ‘fire’ in a crowded theater, but an early Tuesday afternoon development at an investment conference concerning Omniture certainly sparked a firestorm of speculation. During the luncheon at ThinkEquity’s 6th Annual Growth Conference in San Francisco, word came out that Omniture had scrapped its presentation, which had been scheduled for 1:30 p.m. PST. Chief executive Josh James was slated to speak.

Immediately, the money managers began trying to read between the lines. Was the company in play, or had James just missed his flight or something like that? Speculation was flying around the lunch tables and hallways, with people pulling in all sorts of information. One guy noted that the company’s CFO didn’t show up at his scheduled presentation at Deutsche Bank’s technology conference on Monday, either. Another chimed in that maybe executives were delayed by the heavy thunderstorms in Salt Lake City, where Omniture is based. Meanwhile, both the price and trading in shares of Omniture was picking up, after just bumping along up to that point.

As more people at the ThinkEquity conference started gossiping about Omniture, consensus grew that something big was brewing at the Web analytics firm. By the time the stock was halted, just ahead of the closing bell, speculation had shifted to certainty: Omniture was getting taken out. The only question was who was nabbing the company. For the record, not a single one of the hallway matchmakers picked Adobe Systems as the buyer. (Under terms of the deal, Adobe will hand over $21.50 per share, or $1.8bn, for Omniture.) Instead, the names that surfaced as potential acquirers of Omniture included Microsoft, Google and Salesforce.com.

M&A market timing at CA

Brenon Daly

Contact: Brenon Daly

After a two-year hiatus that ended last fall, CA Inc has returned to the market with newfound enthusiasm. With the vendor’s purchase on Monday of network performance management provider NetQoS, CA has now inked six acquisitions over the past 12 months. That comes after an extended period (September 2006 to October 2008) when the normally acquisitive company stepped out of the market entirely.

During that time, CA’s four large rivals (BMC, Hewlett-Packard, IBM and Symantec) announced a total of 61 transactions between them. Collectively, the quartet of buyers paid roughly 5.7 times trailing 12-month (TTM) revenue in the deals they did. (That’s the median valuation from the more than 20 transactions that either had terms disclosed or where we estimated the numbers.)

So from CA’s perspective, sitting out a period marked by historically high valuations might not be a bad thing at all. Consider this: CA’s purchase of NetQoS cost it $200m in cash, which worked out to 3.6x TTM sales. If we slap the prevailing multiple from the period CA was out of the market (5.7x TTM sales) onto CA’s most-recent deal, the price for NetQoS swells to $320m. Obviously, there were vastly different assumptions about growth rates in late 2006 and early 2007 than there are now, which goes a long way toward explaining the nearly 40% ‘discount’ that CA got by inking the NetQoS purchase on Monday rather than when the market was hot.

Informatica: Just dating or something more?

Brenon Daly

Contact: Brenon Daly, Krishna Roy

Is it just dating, or are they looking to get married? That was a question that Wall Street was kicking around last week after Hewlett-Packard and Informatica announced a deeper relationship. The new accord sees HP licensing a number of Informatica’s offerings so that it can provide its customers with data management products. HP is also supplying these same wares from Informatica as part of its existing consulting services for business intelligence (BI) and related arenas and pushing these combined offerings through its direct sales force. (My colleague Krishna Roy has a full report on the tie-up.)

The announcement, which came out last Tuesday, didn’t initially generate much speculation about the relationship between the two longtime partners. However, by Friday, Wall Street was reading much more into the joint agreement. Shares of Informatica rallied almost 7% on Friday, with volume more than three times heavier than average. (The rally continued a strong run by Informatica, which has seen its shares gain some 56% so far this year, vastly outpacing the 32% advance for the Nasdaq in 2009.)

However, both HP and Informatica have taken great pains to position themselves as independent software providers. Indeed, even as HP announced that it would be doing more with its relationship with Informatica, it also clearly said that it will continue to work with other data management and BI vendors. And on the other side, we noted that ‘neutrality’ may have come up in rumored talks last year between Informatica and Oracle. In any case, the independence and openness stand in contrast to the moves in this market by IBM – the rival that’s the primary target of the deeper HP-Informatica partnership. Big Blue spent $1.14bn in cash in March 2005 for Ascential Software, an acquisition that most observers would say hasn’t delivered.

Take-privates are taking more money

Brenon Daly

Contact: Brenon Daly

Even though the volume of take-privates has plummeted this year, the deals that are getting announced appear to be far more competitive than they’ve ever been. At least that’s true after the LBO is announced. So far this year, we’ve seen terms get raised in four take-privates, due to either named or unnamed bidders.

The latest: On Tuesday, an unidentified private equity (PE) firm offered $8 for each share of MSC Software, topping the existing agreement for $7.63 per share that buyout shop Symphony Technology Group had with the maker of design software. The new bid added about $18m to the price of MSC. That follows post-announcement raises in the LBOs of I-many and Entrust, which increased the final purchase prices by $19m and $9m, respectively. And then there was the bidding war over SumTotal Systems between Vista Equity Partners and Accel-KKR that saw the final price come in 50% higher than the initial offer.

But in the case of MSC, we probably shouldn’t be surprised that the initial offer got bumped a bit higher. After all, it was only a scant 13% premium over the previous closing price. Shares of the company actually traded at the price proposed by Symphony just a month before the PE shop unveiled its bid. Although to be fair, much of the run had been triggered by speculation that hedge fund Elliott Associates, the vendor’s largest shareholder, was pushing for a sale of MSC. (Under the plan put forward by Symphony, Elliott would have rolled over its equity.) For the record, the proxy filed in connection with Symphony’s bid indicates that Elliott actually first broached the idea of a sale to MSC in February 2008, a time when shares were changing hands above $12 each.