Author: Brenon Daly

Hey, big spender?

Brenon Daly

Contact: Brenon Daly

Given all the economic uncertainty, companies have made it clear that they’re not in the market for any big deals. (In our annual survey of corporate development officials, they indicated that they were least likely to pursue ‘transformative’ deals in 2009.) To put some numbers around that sentiment, we contrasted the shopping tab of four well-known tech companies in 2008 with the previous year’s tally.

The quartet we selected (IBM, SAP, Microsoft and Nokia) all announced the largest deals in their respective histories in 2007 so we naturally expected some drop-off in spending. But we were amazed at the steepness of the plunge. In 2007, the four companies announced 40 transactions with an aggregate value of $29.2bn. Last year, that dropped to 34 deals worth a paltry $4.7bn. (In fact, each of the firms inked a single transaction in 2007 that was worth more than 2008’s collective total.) And it’s not like they don’t have the resources to continue shopping. Over the past four quarters, IBM, SAP, Microsoft and Nokia have collectively generated an astounding $45bn in cash-flow operations.

And the Golden Tombstone goes to …

Brenon Daly

Contact: Brenon Daly

In addition to getting insight into what corporate development officials plan to buy in the coming year, our annual survey also asked which company they thought made the smartest acquisition during the previous year. (See our full report on the survey.) So which company gets the coveted Golden Tombstone for 2008? Hewlett-Packard, for its $13.9bn purchase of EDS in May.

However, in handing out this peer-voted accolade, we hope that HP doesn’t stumble after stepping up to the dais to accept it, as happened to last year’s winner. (Maybe this is a variation of the ‘Sports Illustrated cover jinx,’ which is a surprisingly accurate predictor of which team is about to hit an inexplicable – and intractable – slump.) Our 2007 Golden Tombstone went to Citrix for its $500m pickup of XenSource.

Although Citrix had promised big things for the virtualization startup, it is coming up short. When the ink had just dried on the acquisition, Citrix talked about $50m (or even higher, privately) of 2008 revenue from the startup, which had no sales to speak of when it sold. Now, it looks like XenDesktop and XenServer will actually contribute about $25m for the year. Granted, the startup XenSource and the 46-year-old EDS are at opposite ends of the corporate lifecycle, and the strategies that drove the deals are completely different. Still, we’re a superstitious bunch, particularly when we’ve already had so much bad luck on the market.

Companies go bargain-hunting

Brenon Daly

Contact: Brenon Daly

It’s a buyer’s market in tech M&A right now, and the buyers are saying they want to do deals but don’t want to pay much. That’s the takeaway from our annual survey of corporate development officials. (We’ll have a full report on the results in tonight’s 451 Group send-out.) Half of the respondents said the M&A climate would get ‘somewhat better’ for them in 2009, with another one-quarter saying it would get ‘significantly better.’

The percentage this year (75%) compares to less than half (43%) who predicted last year that the environment would improve. More than four out of 10 corporate development officials projected that the pace of their company’s dealmaking would pick up in 2009, with three out of 10 saying it would stay the same. As to what will make the environment better for them this year, the short answer is that they don’t expect to pay much. Some 45% said valuations of VC-backed companies would ‘decline substantially,’ with another 42% predicting that valuations would ‘decline somewhat.’ That’s nearly three times as many respondents who projected any decline in startup valuations in 2007. Again, we’ll have a full report on the survey tonight.

Outlook for corporate buyers

Year Improve Unchanged Worsen
2008 (for 2009) 75% 13% 12%
2007 (for 2008) 43% 35% 22%

Source: The 451 Corporate Development Outlook Survey, December 2008

Where did you go, LBO?

Brenon Daly

Contact: Brenon Daly

We finished counting all of the nickels and dimes from last year’s M&A spending and, as expected, we’re looking at a rather paltry total. Overall, acquirers across the globe announced tech deals worth $302bn in 2008, down 30% from the total in 2007. (We explore the reasons for the decline – and what it will mean for dealmaking this year – more fully in our 2009 M&A Outlook.)

Perhaps the most interesting point about M&A last year, which goes a long way toward explaining the one-third decline, is the fact that we saw a sharp contrast in the dealmaking activity of strategic and financial acquirers. For the most part, corporate shoppers continued to buy, with the number of dollars spent dropping ‘just’ 12% from the previous year.

On the other hand, PE shops slashed their dealmaking by 77%, spending roughly the same amount on tech LBOs last year that they did in 2004. And given the state of the current credit market – along with some of the painfully ill-advised bets they made on portfolio companies when the markets were smiling – we can’t imagine that situation will unwind enough to spur much activity in tech LBOs in 2009. Indeed, nearly nine out of 10 corporate development officers we surveyed in mid-December said they expected even less ‘competition’ in deals from PE firms this year.

Annual deal flow

Year Strategic acquisitions Financial acquisitions Total
2008 $275bn $27bn $302bn
2007 $314bn $118bn $432bn
2006 $359bn $98bn $457bn

Source: The 451 M&A KnowledgeBase

North of the border disorder

Brenon Daly

Contact: Brenon Daly

The ‘storm’ caused by Research in Motion’s ‘bold’ play for Certicom looks likely to linger a bit longer. The Blackberry maker originally launched its unsolicited offer for Certicom a month ago, but the cryptography vendor has nixed it. (Certicom also lined up TD Securities to help it fend off the unwanted attention from the fellow Canadian company.) RIM’s bid, which values Certicom at some $52m, was originally slated to expire next week but has been extended through the end of the month.

With this unsolicited offer, RIM joins a growing list of big-name tech firms that have used this once-taboo M&A strategy. Over the past year, firms using unsolicited offers include Microsoft, EMC, Electronic Arts and Cadence Design Systems, among others. If RIM does manage to secure Certicom, it will mark the company’s second recent deal, after some two years out of the market.

Recent Research in Motion deals

Date Target Deal value Rationale
December 2008 Chalk Media $18.4m Mobile content
December 2008 (announced) Certicom $53.2m Encryption
November 2006 Epoch Integration Not disclosed Network management
March 2006 Ascendent Systems $14m* VoIP networking

Source: The 451 M&A KnowledgeBase *451 Group estimate

Intersil: Doubling down in Austin

Brenon Daly

Contact: Brenon Daly

Intersil’s purchase of Zilker Labs last week had more than a few echoes of its pickup of D2Audio last July: same buyer, same banker, same backyard and even a shared backer at the acquired company. Both Zilker Labs and D2Audio are based in Austin and drew venture money from Dallas-based Sevin Rosen. (We understand that Al Schuele, Sevin Rosen’s lone VC in Austin, participated in funding both companies.) On the exit, boutique firm Pagemill Partners advised both Zilker Labs and D2Audio.

Despite the similarities between the exits of Zilker Labs and D2Audio, the companies had virtually nothing to do with each other up until that point. D2Audio makes digital audio power amplifiers, and primarily serves the consumer market. We estimate that Intersil paid around $25m for D2Audio. Intersil’s more-recent purchase of Zilker Labs added power-management technology to its existing portfolio. We estimate that Intersil paid about $18m for Zilker Labs, which raised some $33m in backing.

Intersil’s 2008 acquisitions

Date Target Target’s headquarters
December 18, 2008 Zilker Labs Austin
September 30, 2008 Kenet Woburn, Massachusetts
July 28, 2008 D2Audio Austin

Source: The 451 M&A KnowledgeBase

CA back in M&A

Brenon Daly

Contact: Brenon Daly

It turns out that there is some shopping going on out on Long Island, after all. Back in September, we noted that CA Inc had been out of the market for two years and that some bankers weren’t ‘bothering with the trip’ out to the company’s headquarters. (On a recent call with CA’s corporate development team, which has added four members since the start of the year, one participant good-naturedly tweaked us that he had to end our call to catch a meeting a meeting with a banker.)

Since our original piece, the company has done a lot more than just meet with bankers or ‘book read.’ It has closed three deals and has others in ‘various stages.’ (One note about the M&A pause: CA skipped a period of high-priced deals, and will undoubtedly find that it will get more bang for its buck in the current environment and into next year. In our recent survey of corporate development officials, nine out of 10 said private company valuations are going to come down in 2009.)

The return to shopping is part of CA’s announced intent to add 1-2% of revenue through acquisitions over the year. (On a current $4.1bn revenue base, that works out to $40-$80m of sales at acquired companies.) CA will likely be talking about that – along with other financial matters – during its annual meeting with Wall Street analysts on Friday.

CA’s return to the market

Date Target Target sector
November 13, 2008 Eurekify Identity & access management
October 15, 2008 Optinuity Infrastructure management
October 7, 2008 IDFocus Identity & access management

Source: The 451 M&A KnowledgeBase

Telco equipment troubles

Brenon Daly

Contact: Brenon Daly

For communications infrastructure equipment vendors, it seems that the only thing worse than doing a major acquisition is not doing a major acquisition. At least that’s the only conclusion we can draw from the relative performance of Alcatel-Lucent and Nortel Networks in recent years. Shareholder returns since the Franco-American combination was announced on April 2, 2006: Alcatel-Lucent ‘only’ down 85%, compared to Nortel’s drop of 99%.

Both companies have been in the news recently as they look for ways out of their protracted slumps. For Alcatel-Lucent, the future appears to be in Web 2.0, whatever that means. (That’s a bit of an oversimplification. To read what the company actually plans, view my colleague Gilad Nass’ report on the company’s restructuring.)

Meanwhile, the outlook at Nortel has gotten so bad that some reports last week indicated that the company may be forced into bankruptcy in the near future. Nortel quickly dismissed this, pointing out that it still has a cash cushion and doesn’t have any debt coming due until 2011. Nonetheless, Nortel shares are changing hands at their lowest-ever level (closing at 33 cents each on Monday) and may get booted off the Big Board because the stock price doesn’t meet the NYSE’s minimums for listing. Nortel’s current market capitalization is just $164m, but because of all the debt it carries, its enterprise value is $2.5bn.

We honestly can’t envision another strategic acquirer stepping in to buy Nortel, even at its current bargain-basement price. And forget about a buyout shop making a run at the company, given the frozen credit market and Nortel’s cash burn. But what about a piecemeal sale of the vendor, continuing its already announced divestiture plan?

Well, we suspect Microsoft would be interested in some of Nortel’s unified communications (UC) technology. There have been rumors of a deal between the two companies ever since they announced their UC partnership, dubbed Innovative Communications Alliance, in July 2006. (That was back when Nortel shares were changing hands at about $20 each, giving it a market capitalization of roughly $10bn.) Despite that rumor, we don’t see Microsoft getting into the business of selling base stations and routers, which would come with all of Nortel. If indeed Nortel goes bankrupt, however, Microsoft might be able to snag the UC assets in a court-supervised auction.

National Lampoon CEO indicted

Brenon Daly

A month ago, we wrote about one of the more unusual deals that we have seen in some time: National Lampoon picked up BarackObamaJokes.com just after the election. At the time, we noted that the acquisition was part of a larger shopping spree by the long-in-the-tooth humor site, which has inked a half-dozen deals so far this year. It was part of a make-over of National Lampoon from a licensing outfit (living off royalties from Animal House, the Vacation series and other earlier films) to one with actual operations. Additionally, we noted that the company traded on the Amex.

Imagine our surprise this morning amid reports that National Lampoon’s CEO Dan Laikin (who we spoke with around the deal) has been arrested and charged with conspiracy and securities fraud, allegedly trying to improperly inflate the company’s share price. According to the indictment, Laikin hired stock promoters to buy National Lampoon shares, as well as bribing other brokers to buy shares. Knowing that, Laikin’s final comments to us make a lot more sense: He asked if we were planning on buying any shares for ourselves.

NetApp: Barenaked savings

Brenon Daly

Contact: Brenon Daly

What do the Barenaked Ladies and SnapMirror for Open Systems have in common? Well, both have been canceled recently by NetApp in a bid to save money as growth rates at the storage giant continue to head south. The company is currently more than halfway through its fiscal year, which wraps at the end of April, and its projected growth rate of 9% is shaping up to be just half the level it was last year (18%), which was half the level it was the year before that (36%). And given the economic environment, estimates may well decline again between now and when it actually reports results.

Like many companies facing the current recession, NetApp’s answer has been to cut costs. In October, it scratched plans for its user conference, NetApp Accelerate (the Barenaked Ladies had been booked to play one night at the event, which was slated for February). And then last week, NetApp said in an SEC filing that it was shuttering the SnapMirror for Open Systems product line. It will take a charge of as much as $20m (roughly two-thirds of that as a straight write-down and one-third for possible payments for facilities closures and severance agreements).

SnapMirror came with NetApp’s pricey acquisition of Topio in November 2006. The company paid $160m for Topio, which we understand was generating less than $10m in sales. The curtain will fall on SnapMirror before the end of NetApp’s fiscal year, which should help its cost structure for the year. NetApp could certainly use a boost in this area. The company runs at just a 10% operating margin, and has seen the increase in operating expenses outstrip the increase in sales during the first two quarters of its current fiscal year.

Select NetApp acquisitions

Date Target Deal value Rationale
January 2008 Onaro $105m SAN management software
November 2006 Topio $160m Disaster-recovery software
June 2005 Decru $272m Storage security
November 2003 Spinnaker Networks $300m High-end storage

Source: The 451 M&A KnowledgeBase