Author: Brenon Daly

April M&A: not ‘cruel’ at all

Brenon Daly

Contact: Brenon Daly

With all due respect to T.S. Eliot, April actually turned out to be a pretty kind month, at least for dealmakers. (The poet’s justifiably renowned work, The Waste Land, begins, “April is the cruelest month, breeding / Lilacs out of the dead land….”) The number of transactions announced in the just-completed month hit the highest level we’ve seen so far in 2009. Indeed, it was the largest monthly tally since October, when Wall Street truly looked like a wasteland.

The surge in M&A spending is even more noteworthy. The aggregate value of announced deals in April was roughly $21bn, the richest single monthly total since June 2008. In fact, tech shoppers spent substantially more in April alone than they had in the previous four months combined (December 1, 2008-March 31, 2009: $16bn). We’ve noted some of the encouraging signs in the M&A market that could continue to boost shopping through the rest of the year. Maybe 2009 won’t be such a cruel year for dealmaking after all.

Deal flow, 2009

Month Deal volume Deal value
January 2009 219 $3bn
February 2009 191 $2bn
March 2009 235 $4bn
April 2009 255 $21bn

Source: The 451 M&A KnowledgeBase

Second time’s a charm for I-many?

Brenon Daly

Contact: Brenon Daly

As it reported its first profit since going public in 2000, I-many also said Wednesday that it will be going private in a $36m buyout by LLR Partners. The Philadelphia-based buyout shop – led by Greg Case, who joined LLR from Apax Partners last fall – offered 43 cents for each share of I-many. (Montgomery & Co banked I-many, with Rob Louv, John Cooper and Joe Morgan handling the mandate.) We understand that a number of other private equity firms looked at I-many, with the process picking up momentum at the end of last year.

While the proposed acquisition is slated to close this summer, it still has to clear a few hurdles. For starters, terms can change if I-many’s cash holdings dip below $8m before the deal closes. The company, which held $9m in cash at the end of the first quarter and expects to generate cash every quarter this year, said in a conference call that the $8m requirement is a ‘conservative’ level. So it shouldn’t have trouble hitting that. Indeed, I-many shares were trading in line with LLR’s offer on Thursday.

The other big obstacle is a shareholder vote. Since the offer represents a 70% premium over where I-many’s shares were trading before the bid, one might think that a sign-off is automatic. But I-many’s shareholders have already shot down one offer. In December 2004, Selectica bid some $70m for I-many. That offer didn’t make it through because I-many’s shareholders said it undervalued the company. Indeed, a year and a half later, I-many shares had doubled.

The end of 2007, however, proved to be the high-water mark for shares of I-many. From more than $3, they dropped to a low of about a dime late last year. The company was in danger of getting delisted from the Nasdaq, which would have accelerated the payment of the notes that it sold in December 2007. According to terms, note holders have agreed to hold off on that, and will redeem them when the deal closes.

Going it alone can be expensive

Brenon Daly

Contact: Brenon Daly, Henry Baltazar

Wall Street hasn’t been particularly supportive of tech companies that turn down unsolicited offers and opt to go it alone. Shares in a number of the targeted firms are currently changing hands at less than half the level that the would-be suitors were willing to pay for them. To wit: Microsoft was reportedly set to pay in the mid-$30s for each share of Yahoo, which is now trading in the mid-teens. And having spurned a $16-per-share unsolicited bid from Cadence Design Systems last summer, Mentor Graphics stock is now trading at about $7.

We mention that bit of cautionary history because there’s another showdown brewing. Broadcom, advised by Banc of America Securities, recently offered $9.25 for each share of Emulex, giving the unsolicited bid a total equity value of $764m. (As it often does, Goldman Sachs is advising the target.)

Broadcom’s bid values Emulex where it was trading last October. On an enterprise value basis, the proposed transaction values the maker of storage networking gear at just 1.2x its trailing 12-month (TTM) sales and 5.5x TTM EBITDA. Emulex investors want a richer valuation and have pushed the stock above $10 since the offer was unveiled. Broadcom has vowed to take the unsolicited bid directly to shareholders if the Emulex board rebuffs it. On its conference call Monday discussing fiscal third-quarter results, Emulex said only that it was ‘thoroughly’ reviewing Broadcom’s offer.

From Broadcom’s point of view, it’s understandable why it would want its fellow southern California-based company. If the deal goes through, Broadcom would get a foothold in a few interesting storage markets such as host bus adapters (for both standard servers and blade servers) and embedded storage processors for disk arrays. Broadcom sells Gigabit Ethernet and 10-Gigabit Ethernet products, but is not a player in the SAN market. With network convergence growing in popularity, Broadcom would also benefit from Emulex’s fiber channel technology and its new Fiber Channel over Ethernet adapters.

A bid and a raise for SumTotal

Brenon Daly

Contact: Brenon Daly

The sum total of all interested parties in SumTotal Systems may well be greater than the two that have already disclosed themselves. At least that’s the thinking among investors – or rather, speculators – in the learning management software vendor. Recall that earlier this month, Vista Equity Partners tossed the struggling company an unsolicited offer of $3.25 for each share. (Vista is being advised by Union Square Advisors.) As we noted, the bid included a ‘go-shop’ provision.

SumTotal never got back to Vista on its offer, but it did throw its arms around a slightly richer one from Accel-KKR on Friday. The white knight bid $3.80 for each SumTotal share, valuing the company at about $124m, or $20m more than Vista’s offer. However, we would note that SumTotal shares have traded slightly above Accel-KKR’s offer price since the bid was unveiled. (On Monday afternoon, SumTotal stock was changing hands at $3.85.) Like Vista’s initial offer, Accel-KKR’s included a go-shop provision. On that front, it seems like the shopping may not be done for SumTotal.

‘Animal spirits’ stir M&A market

Brenon Daly

Contact: Brenon Daly

The M&A market is back. OK, not really. But looking at this week’s deal flow, one could forget that spending on acquisitions plummeted 85% in the first three months of the year. (We recently noted that Q1 2009 was the first time since we began tracking tech M&A in January 2002 that we saw a quarter without a deal worth more than $1bn.) Literally as soon as the calendar flipped to April, we saw one 10-digit transaction, and that’s been followed by three others.

Of course, most people point to Oracle’s pending purchase of Sun Microsystems as evidence that ‘animal spirits’ (as Keynes would say) are starting to stir again. That purchase stands as the largest IT transaction since Hewlett-Packard’s $13.9bn acquisition of EDS last May. (Yesterday we reported how Oracle’s planned pickup has reshuffled our league table, at least in the early going of 2009.) Another way to view the mammoth size of the deal is to consider that the $260m break-up fee in Oracle-Sun is larger than all but 15 of the announced deal values so far this year. (As an aside, we would note that the $260m represents 3.5% of the deal value, which is a point above where many other transactions come in.)

However, there were other signs of life in the sector this week beyond that big acquisition. Well-known buyer Symantec returned to the market for the first time in a half-year, paying what we understand was $18m for Mi5 Networks. Also, private equity players notched a pair of deals. And we even saw an unsolicited bid for a public company. We would note that it wasn’t a run at some micro-cap company that no one has ever heard of, much less owns shares in. Emulex is a 30-year-old vendor that earns money and typically trades about three million shares each day. Broadcom offered $9.25 for each share of Emulex, for a total equity value of $764m. However, Emulex stock has been trading above $10 since the offer.

Credit Suisse: Leaping up the league table

Brenon Daly

by Brenon Daly

While most of the focus of Oracle’s mammoth purchase of Sun Microsystems has been on the impact on the tech landscape, we’d like to note that the pending transaction is also likely to radically reshape another market: tech banking. True to form, Oracle didn’t use an outside adviser, while Sun tapped George Boutros and Storm Duncan from Credit Suisse Securities. That means CS gets sole credit for the largest tech deal of 2009, vaulting to the head of our league table.

To put the pending Oracle-Sun deal into perspective, consider that the equity value ($7.4bn) is larger than the total announced equity value of all US IT transactions that CS advised on in 2008 ($6bn). In our annual league table report, CS ranked as the 11th-busiest tech adviser, after finishing third in 2007. In the early going of 2009, CS is the bank to catch. (It also has a co-credit, along with Barclays Bank, for helping to sell Interwoven to Autonomy Corp, which was banked by Deutsche Bank Securities and Morgan Stanley. That was the largest deal of the first quarter.)

Tech banking, of course, is only a small part of the overall operations at Zurich-based Credit Suisse Group. And on Thursday, the institution had some good news for Wall Street. It reported better-than-expected earnings of some $1.7bn for the first quarter. Several other rival banks also posted positive results. The ADRs of CS added 15% in late-afternoon trading on Thursday, meaning they have risen by one-third in value since the start of 2009.

A somewhat secure M&A market

Brenon Daly

Contact: Brenon Daly

With RSA set to open later this week, we thought we’d take a look back on deal flow since the trade show closed last year. Over the past year, we’ve seen some 83 acquisitions of security companies, with total spending of about $4.2bn. While that’s down from the comparable year-earlier period (April 2007-April 2008: 90 deals worth $5.2bn), the drop-off in security M&A has not been as steep as the overall decline in tech deals. In fact, the number of security transactions slipped just 7% from the previous year, compared to an 18% drop in the number of total tech M&A. Spending on security deals also fell less than the overall market.

Moreover, there are a number of trends that have emerged since the last RSA event that suggest security M&A may well remain healthier than the overall market. For starters, the big shoppers have done big deals. By our tally, Symantec has inked the largest security transaction since the end of last year’s RSA, paying $695m in cash to bolster its on-demand offering with MessageLabs. And McAfee checked in with the second-largest acquisition. Its $497m all-cash purchase of Secure Computing was its largest deal in a decade, and its only acquisition of a public company in at least seven years (excluding the pickup of Bulletin Board-listed Citadel Security Software in 2006).

In addition to the strategic vendors, we’re also seeing financial buyers – both through funds and PE-backed companies – looking to do deals. For instance, Sophos went back to its investors to help finance its $341m acquisition of Utimaco, the largest purchase by a privately held security company of a public counterpart. Also, Vector Capital took home Aladdin Knowledge Systems and, more recently, Thoma Bravo has a pending $114m offer for Entrust. Certainly there have been a few scrap sales, but that’s to be expected in an over-funded market like security. Overall, deal flow remains comparatively healthy in the security sector.

Oracle-Sun: a system on the cheap

Brenon Daly

Contact: Brenon Daly

Oracle’s big step into the hardware market comes at a relatively small price. In buying Sun Microsystems, Oracle is paying just one-tenth the valuation that it paid in its other multibillion-dollar acquisitions. The difference: the other purchases added software vendors with increasing sales and solid profitability, while Sun provides neither of those. Sun revenue is likely to slip about 10% in the current fiscal year, which ends in June, and the company has lost money in three of the past four quarters.

Still, the valuation drop-off is striking. Sun had generated some $13.3bn in trailing 12-month (TTM) revenue. Based on an offer that gives Sun an enterprise value (EV) of $5.6bn, Oracle is paying just 0.42x Sun’s TTM sales. In the four other acquisitions worth more than $1bn that Oracle has inked, the company has paid between 3.7x EV/TTM (Hyperion Solutions) and 5.2x EV/TTM sales (BEA Systems.)

Oracle’s multibillion-dollar deals

Date Target Equity value EV/TTM sales
December 2004 PeopleSoft $10.46bn 3.9x
January 2008 BEA Systems $8.5bn 5.2x
April 2009 Sun Microsystems $7.4bn 0.46x
September 2005 Siebel Systems $5.85bn 4x
March 2007 Hyperion Solutions $3.3bn 3.7x

Source: The 451 M&A KnowledgeBase

Symantec goes box shopping?

Brenon Daly

Contact: Brenon Daly

After holding off for some time, Websense finally rolled out its first secure Web gateway appliance earlier this month. Now we’re hearing that another major security vendor is about to get into the box business. Only this time, it’ll be through acquisition, rather than internal development like it was at Websense. Several market sources have indicated that Symantec has purchased Mi5 Networks, a security appliance startup based in Sunnyvale, California.

The acquisition is expected to be announced at next week’s RSA conference, according to a source. If indeed the deal goes through, it will be Symantec’s first since picking up MessageLabs for $695m last October. Obviously, the purchase of five-year-old Mi5 would be much smaller. (We weren’t able to learn terms of the deal.)

Mi5 has raised just $3.5m in venture backing from Labrador Ventures, First Round Capital and several angel investors. Among the company’s early backers is Sunil Paul, who founded Brightmail. (That’s right, the very same company that was run by current Symantec CEO Enrique Salem.) And finally, there’s an even more direct link in the rumored pairing: Mi5 is currently headed by Doug Camplejohn, a former executive at Vontu, which Symantec acquired in late 2007.

EBay unwinds and adds on

Brenon Daly

Contact: Brenon Daly

For a company that essentially matches buyers and sellers, eBay has been doing a lot of dealing of its own this week. It has picked up a controlling stake in Gmarket, the South Korean online auction house. When we wrote about this possible deal in mid-August, we noted that eBay was willing to pay a not-insignificant premium for Gmarket. Makes sense, given that international sales have been growing more than twice as fast as US sales in recent quarters. (Ebay reports first-quarter earnings next Wednesday.)

The acquisition of a chunk of Gmarket, which is eBay’s first purchase since November, comes as the company also moved to unwind a pair of previous purchases. In the more straightforward of the two, eBay said it will sell StumbleUpon back to the founders of the online bookmarking site. The divestiture comes two years after eBay paid $75m for the property.

We would note that the deal is actually the second sale of an online bookmarking site in the past month. In mid-March, LookSmart divested its Furl property to Diigo, picking up an undisclosed chunk of equity in its privately held rival. While neither transaction performed as the acquirer had hoped, LookSmart did indeed look smarter than eBay because it paid only $1m for its flier on Furl, compared to the $75m that eBay handed over for StumbleUpon.

Rather than go the same route of divesting to former owners, eBay hopes to find a whole new set of buyers for its planned unwinding of Skype. It plans to spin the VoIP vendor to public market investors next year. (We’ll withhold comment on the rather unconventional ‘dual track’ that eBay has now set up for Skype. Just as we’ll withhold comment on the fact that ‘Skype’ rhymes with ‘hype.’)

If it’s lucky, eBay may see the division valued at about half of the $4.1bn that it spent on Skype (including earnouts) back in September 2005. EBay has already acknowledged that it overpaid for Skype, writing down some $1.4bn of the purchase price. While reports have indicated that Skype’s initial founders may be trying to repurchase the company from eBay (a la StumbleUpon), it appears those talks have ended. Still, we could very well see Skype getting snapped up in a trade sale before it hits the public market next year. In a mid-October report, we noted that any of the telcos or even Nokia might be interested in owning the largest VoIP provider.

eBay deal flow

Year Deal volume Deal value
2009 0* $0*
2008 4 $1.5bn
2007 3 $385m
2006 2 $75m
2005 7 $5.1bn

Source: The 451 M&A KnowledgeBase *Excludes purchase of controlling stake of Gmarket