Author: Brenon Daly

Former PC buyer focuses on InFocus

Brenon Daly

Contact: Brenon Daly

Having already played a central role in much of the recent consolidation of the PC industry, John Hui has shifted his attention to another segment of the tech hardware market: digital projectors. Hui on Monday unveiled a take-private plan for long-suffering InFocus, offering 95 cents for each of the 41 million shares of the digital projector maker. The board of directors, which includes an activist shareholder, has signed off on the $39m tender offer. The bid will go out within two weeks and needs two-thirds of shareholders to support it. (InFocus management and the company’s largest shareholder, who holds 12% of the company, have agreed to back the buyout.)

Hui founded and took public eMachines in 2000. Shares traded underwater after the offer and Hui, advised by Los Angeles-based boutique Averil Capital Markets Group, took the company private the following year in a $161m deal. Hui then turned around and sold eMachines to Gateway for some $256m in early 2004. Following the sale, Hui held a large stake of Gateway and looked to expand that through an unsolicited offer for Gateway’s retail PC division in 2006. Instead, Acer picked up Gateway for $710m in cash in 2007. Shortly after that deal closed, the combined Acer/Gateway acquired Hui’s 75% stake in European PC vendor Packard Bell.

For all of the buying and selling over the past decade, Hui has tapped Averil founder Diana Maranon, a former banker at Wasserstein Perella & Co. (remember that firm?) and lawyer at Skadden Arps. On the other side, InFocus retained a trio of bankers (Blake Kim, Brian Sapp and Seth Ferguson) from Thomas Weisel Partners. The mandate actually dates back to mid-December, when the company hired TWP to help it evaluate an unsolicited approach.

Empire Capital: rain-making in security M&A

Brenon Daly

Contact: Brenon Daly

For the second time in less than a year, a micro-cap security company in which hedge fund Empire Capital holds a big position is being taken off the board. On Monday, Entrust said it agreed to a $114m offer from buyout firm Thoma Bravo. Terms call for the acquirer to pay $1.85 for each of the 61.3 million Entrust shares outstanding. The roughly 22% premium essentially values Entrust where it was last October. (The deal also carries a ‘go-shop’ provision.)

Empire, which has a seat on Entrust’s board, holds about 11.8 million shares of the company, or 19% of the total. (That means the hedge fund’s payday for its stake will be just $22m.) Although the board has signed off on it, the terms of the buyout aren’t exactly staggeringly rich: Entrust has $24m in cash and no debt, lowering the company’s enterprise value to just $90m. Entrust did about $100m in sales in 2008 and was expected to record only a slight dip in revenue this year, according to Wall Street projections.

The valuation of less than 1x trailing revenue for Entrust is just half the level of Tumbleweed Communications, the previous security company that Empire was involved with. In a trade sale last June, Tumbleweed got picked up by French rival Sopra. The deal valued Tumbleweed at nearly 2x trailing sales. Of course, it was a different time back then. For its part, Entrust was trading at about $3 on the day Sopra announced the Tumbleweed acquisition.

Revenue refresh through M&A

Brenon Daly

Contact: Brenon Daly

Having recently lost several key Asian customers in the brutally competitive digital TV market, Trident Microsystems went shopping in Europe last week to rebuild its top line. On its trip, Trident got a pretty good bargain. It will hand over some seven million shares, valued at roughly $10.3m, to Switzerland’s Micronas Semiconductor for three consumer product lines. We understand that the three units were generating more than $100m a year in sales.

The purchase comes at a crucial time for Trident. Revenue at the company has plummeted from $258m in the past fiscal year, which ended last June. With two quarters and guidance for the third quarter already in the books, revenue at Trident has totaled just $61m. That implies sales for the current fiscal year could well be just one-quarter the previous fiscal year’s figure. Along the way, Trident has slipped from a profitable business to a cash-burning one. Its difficulties haven’t been lost on Wall Street, which values the debt-free vendor at about $100m, just half its current cash level.

Trident’s pending pickup of the three Micronas units should help, both on the top and bottom lines. (Union Square Advisors worked with Trident while Micronas went with hometown bank Credit Suisse Securities.) The company indicated that the acquisition should put revenue at $35m for the quarter that ends in September, essentially matching the previous year’s level. More importantly, the combination will boost Trident’s earnings from the very start and slow its cash burn. The firm will have more to say about the deal, which will dramatically expand its portfolio and end markets, when it reports fiscal third-quarter earnings later this month. Meanwhile, we would note that Trident shares are slightly above where they were when the vendor announced the acquisition

PE firm calculates SumTotal

Brenon Daly

Contact: Brenon Daly

A half-decade ago, a pair of struggling public companies joined together in an effort to capitalize on the fragmented e-learning market. Click2Learn.com and Docent, which had beat up on each other for years, merged into a single company under the name SumTotal Systems. (Shareholders of Click2Learn held 52% of the combined entity, with Docent shareholders owning the rest.) The merger did little to help SumTotal’s performance on the Nasdaq. Since the pairing, which closed in mid-March 2004, the stock had dropped from above $8 to a low of $1.33 last month.

Earlier this week, Vista Equity Partners floated a bid of $3.25 for each of the 31.8 million shares of SumTotal outstanding. The buyout firm owns about four million SumTotal shares, or about 12.6% of the total. Vista started to accumulate its position in September, when the stock was just under $5, according to US Securities and Exchange Commission filings. Vista is the company’s largest shareholder. In addition, the second-largest holder, Discovery Group, has indicated that it wants SumTotal to sell the business. For its part, SumTotal (advised by RBC Capital Markets) has said only that it is reviewing the offer.

Vista’s unsolicited offer for SumTotal has more than a few echoes of Vector Capital’s recent grab of Aladdin Knowledge Systems. Both unsolicited bids came from San Francisco-based PE shops that had amassed a large stake in each company. Both valued the targeted company at less than 1x trailing sales, on enterprise value. (And somewhat unusually, both offers included ‘go-shop’ provisions.) There is one crucial difference, however, between the two targets: SumTotal isn’t profitable, and in fact has never turned a profit. Altogether, it has rung up an eye-popping $353m in accumulated deficit.

IBM-Sun: Nothing but March madness?

Brenon Daly

Contact: Brenon Daly

Maybe the speculation around IBM buying Sun Microsystems was nothing more than a bit of March Madness. When reports surfaced last month that a deal could be in the works, Sun’s long-ailing shares soared from about $5 to nearly $9 in a single session. (At the time, we also looked at what a potential pairing of the tech giants might mean.) And it wasn’t just sporadic trading that powered the mid-March move. More than 160 million Sun shares traded the day after The Wall Street Journal carried its report on initial talks, meaning volume was eight times heavier than average.

It turns out that anybody who bought the stock from then until last Friday is now underwater. (Or to continue our NCAA basketball terminology, they’ve had their bracket busted.) Both the WSJ and The New York Times reported Monday that a deal – even at a lowered price – may be off the table. Sun shares gave up one-quarter of their value in Monday afternoon trading, falling to about $6.50 each. Volume was again several times heavier than average.

Amid all these reports of tough negotiating and ‘recalibrated’ deal terms, we’re reminded of the five-month saga of one public company buying another public company last year. In mid-July, Brocade Communications unveiled a $3bn offer for Foundry Networks, paying nearly all of that in cash and only a tiny slice in equity. As the equity markets plunged last October, the two sides agreed to lower the deal value to $2.6bn by trimming the cash price and removing the equity component. (Brocade shares had been cut in half during the time from the announcement to the readjustment.)

Now, the combined Brocade-Foundry entity, which has existed since mid-December, has a total market capitalization of just $1.5bn. In fact, my colleague Simon Robinson recently speculated that Brocade may be attracting interest from suitors. One of the names that has popped up? IBM, which would get an instant presence in the networking market. And if Big Blue is done with Sun (as reports suggest), then perhaps the company will just shift its M&A focus.

Tough exits for VCs

Brenon Daly

Contact: Brenon Daly, Thomas Rasmussen

After being frozen for more than six months, there were some signs of a thaw this week in the tech IPO market. Chinese game maker Changyou.com enjoyed a strong debut on Thursday, and only inched down slightly in the following session. In addition, language software maker Rosetta Stone set the terms of its planned offering earlier in the week.

While the offerings are encouraging from a capital markets perspective, the same can’t be said for the VC community. The IPOs of Changyou.com and Rosetta Stone won’t mean a payoff for any of the Sand Hill Road crowd. (Changyou.com is a spinoff from online portal Soho, while Rosetta Stone counts a pair of buyout shops as its majority owners.) Of course, VCs have long since given up on betting on IPOs to boost their returns. Most acknowledge that for every portfolio company that does make it onto the public market, nearly 10 startups will get snapped up in a trade sale.

Unfortunately, there’s bad news on the M&A front, as well. My colleague Thomas Rasmussen calculated that the median valuation in the sale of VC-backed companies in the first quarter of 2009 slumped to 2.1x trailing 12-month (TTM) sales, compared to 3.8x TTM sales during the same period last year. Granted, that multiple was about twice as rich as first-quarter sales of non-VC-backed companies. But we would be quick to add that the 2.1x TTM sales multiple essentially matches the level for non-VC-backed startups in the first quarter of 2008. For more on first-quarter valuations and overall deal flow, see our first-quarter M&A report.

Buyers’ strike

Brenon Daly

Contact: Brenon Daly

When the Nasdaq was on an uninterrupted slide from early February to early March, market pundits talked about a ‘buyers’ strike’ by investors. (The month-long decline, which erased some 20% from the index, sank the Nasdaq close to levels not seen since the tech industry was emerging from the wreck in 2002. It has since rebounded above month-ago levels.) Apparently, that buyers’ strike also carried over to the companies’ M&A plans during the first three months of the year.

Publicly traded tech companies inked just 119 deals, which is half the level as the same quarter in 2008. The decline in spending is even more pronounced: In the first quarter, US public companies announced a grand total of just $3.2bn, which is one-tenth the level ($39.4bn) during the same period last year. We would note that even typically busy tech buyers such as Symantec, Citrix, Google and Hewlett-Packard all sat out the first quarter. And many of the big tech shoppers that did announce transactions just picked up assets from startups. Among the buyers of wind-downs were Netezza, SAP, EMC and Quest Software.

Combine the reluctance of corporate buyers with the disappearance of financial acquirers, and it’s no wonder tech M&A plunged to a record low in the quarter. As we recently noted, spending on deals plunged 85% quarter over quarter to just $8bn. Look for our full report on first-quarter tech M&A in tonight’s sendout.

Q1 M&A: Recession hits deal-making

Brenon Daly

Contact: Brenon Daly

We’ve just finished tallying the first-quarter tech M&A numbers, and the picture is pretty bleak. In the first three months of the year, there were just 625 tech and telecom transactions, with total spending in the quarter hitting a mere $8bn. Compared to the first quarter of 2008, the number of deals dropped by about one-quarter, while spending plummeted 85%.

The main reason for the sharp decline in spending is the disappearance of big deals. In fact, for the first time in the seven years we’ve kept records on tech M&A, buyers didn’t announce a single transaction worth more than $1bn during the quarter. During 2006 and 2007, we saw an average of about 18 deals announced each quarter that were valued at more than $1bn. Even last year, when the current recession began to be felt, we still saw an average of some nine billion-dollar-plus deals each quarter. (However, on Wednesday, which is the first day of the second quarter, Fidelity National Information Services said it would acquire Metavante for almost $3bn in an all-stock deal.) The largest single transaction in the first quarter was Autonomy Corp’s $775m purchase of Interwoven.

Projecting annual totals from a single quarter is hardly an accurate way to predict deal flow, particularly in a lumpy business like M&A. (The Fidelity National-Metavante transaction underscores that.) Nonetheless, we would note that right now, 2009 is on track to post the lowest deal spending totals since the Internet bubble burst. The current low-water mark was hit in 2003, when spending totaled just $61bn. Since then, tech M&A has boomed, with spending in each of the past four years topping $300bn. But the way it looks now, 2009 is shaping up as a year when we could very well measure annual tech M&A spending in the tens of billions of dollars, rather than hundreds of billions of dollars. We’ll have a full report on first-quarter M&A on Thursday.

Quarter-by-quarter M&A totals

Period Deal volume Deal value
Q1 2009 625 $8bn
Q4 2008 721 $40.7bn
Q3 2008 733 $32.2bn
Q2 2008 716 $173.2bn
Q1 2008 835 $55.2bn

Source: The 451 M&A KnowledgeBase

Shopping sites

Brenon Daly

Contact: Brenon Daly

Fittingly for a laptop that’s marketed on its thin and sleek looks, Dell’s Adamo appears to be getting a thinner and sleeker Web location. The computer maker currently has all of the information on Adamo (think MacBook Air) loaded onto the somewhat clunky address of adamobydell.com. That is in the process of changing as Dell has reportedly purchased the adamo.com site from a cyber-squatter.

While there hasn’t been any official word from Dell, visitors to adamo.com are automatically loaded onto the adamobydell.com site. Dell reportedly purchased the URL from YummyNames, a division of Canadian publicly traded company Tucows. (For the record, Dell’s market capitalization of $19bn is some 730 times larger than Tucows’, which stands at just $26m on the Amex.)

Whatever the details of the deal, we highly doubt that Dell’s reported purchase Monday of the Web address adamo.com will have anything in common with the last URL pickup we highlighted. Back in November, we noted that National Lampoon snared BarackObamaJokes.com for a few thousand dollars. Just a month later, National Lampoon was rocked by charges from the US Securities and Exchange Commission alleging conspiracy and securities fraud. Former CEO Dan Laikin has been arrested and is waiting to stand trial.

Back-of-the-envelope thinking on Red Hat-Oracle

Brenon Daly

Contact: Brenon Daly

If Oracle was seriously planning a bid for Red Hat (and we have our doubts about such a pairing), then Larry Ellison had better be prepared to reach deeper into his pocket. Following Red Hat’s solid fiscal fourth-quarter report, shares of the Linux giant jumped 17% to $17.60 on Thursday. That added about a half-billion dollars to Red Hat’s price tag, with the company now sporting a fully diluted equity value of some $3.5bn.

Looking back at the nine US public companies that Oracle has acquired this decade, we would note that Oracle has paid an average premium of 14% above the previous day’s closing price at the target company. (Note: We excluded the two-year-long saga around PeopleSoft.) If we apply that premium, which we acknowledge is crudely calculated, to Red Hat, the company’s equity value swells to $4bn, or about $21 per share. That’s essentially where Red Hat shares changed hands in August, before Wall Street imploded.

On the other side of the table, Red Hat recently cleaned up its balance sheet, which certainly makes it a more palatable target. (Again, we don’t think the company is in play, much less took the steps to catch Oracle’s eye. More so, that it was just good fiscal practice.) Specifically, Red Hat paid off all of its debt and finished its fiscal year, which ended last month, with $663m in cash and short-term investments. That would be a nice ‘rebate’ for any potential buyer, in the unlikely event that Ellison or anyone else reaches for Red Hat.