Category: investment banking

Are the go-go days for tech M&A go-go-gone?

Brenon Daly

Contact: Brenon Daly

Twice a year, 451 Research and Morrison & Foerster survey many of the top tech dealmakers to get their views on the M&A market, both on current activity levels and valuation trends, as well as forecasts. (See our full report on our recent M&A Leaders’ Survey.) In this go-round, we decided to extend the outlook with a rather provocative question: will we ever see another boom time in tech M&A?

Specifically, we asked respondents to look ahead for the next half-decade and give us their best guess as to whether tech M&A spending would ever regain the levels of 2006 and 2007, years in which buyers handed over a total M&A consideration of about $450bn. (Yes, almost a half-trillion dollars worth of deals were announced in both those years.) Hitting that level would effectively mean doubling the total amount spent on tech deals around the world in each year since the end of the recession.

The answer? Roughly 40% of respondents said it would probably happen, while 30% said it probably won’t happen. The remaining 30% said it was ’50-50′ whether spending would get back to prerecession boom levels any time before 2018. (Again, for more on this question, as well as the outlook for M&A activity and valuations in 2014, see our full report.)

What is the likelihood that M&A spending will recover to prerecession levels?

Response Percent
Absolutely will not recover 2%
Probably will not recover 27%
50/50 chance will recover 31%
Probably will recover 35%
Absolutely will recover 5%

Source: M&A Leaders’ Survey from 451 Research / Morrison & Foerster

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Who has designs on Planview?

Brenon Daly

by Brenon Daly

Old-line project and portfolio management (PPM) vendor Planview may be getting new owners soon. The 24-year-old company is rumored to be close to wrapping up a sale process, which has been led by Lazard. The buyer is likely to be a private equity (PE) shop, although one tech company is also apparently taking a long look. No final price has been struck, but Planview will likely trade in the neighborhood of $200m, according to our understanding.

The rumored price would value Planview at roughly 3x trailing sales. That’s exactly the valuation of the last significant transaction in the PPM market. In August 2012, Thoma Bravo paid $990m, or about 3x trailing sales, for Deltek, a government-focused PPM provider. PE firms have been fairly active in the PPM sector, with Parallax Capital Partners and Vista Equity Partners, among others, having inked acquisitions.

In terms of strategic acquirers, Planview probably has the closest relationship with SAP, primarily through a long-standing association with Business Objects. And don’t forget, too, that rival Oracle has already snapped up a large privately held PPM vendor, adding Primavera Software five years ago. Although terms weren’t disclosed in that deal, we estimate that Oracle handed over roughly $350m for PE-backed Primavera.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

PE shops taking home tech companies that are old and in the way on Wall Street

Brenon Daly

Contact: Brenon Daly

More and more, the portfolios of private equity (PE) firms are looking like retirement homes for the ever-maturing tech industry. Consider Marlin Equity Partners’ proposed $891m take-private of Tellabs, announced this morning. The company has been hawking its networking equipment gear since 1975, and has seen its share of ups and down over the past four decades in business. Tellabs currently finds itself in one of those protracted ‘downs,’ having shrunk for three straight years. The leveraged buyout (LBO) reflects that, with Marlin valuing Tellabs, net of its substantial cash holding, at just 0.4x trailing sales.

By our count, the Tellabs take-private is the ninth tech LBO valued at more than $300m announced so far this year. (To be clear, that’s equity value for a full business, and excludes any pickups of businesses divested by public companies.) On average, the companies that have been erased recently from the public market by PE firms were founded in 1990. The ‘youngest’ company was founded in 1998, exactly the same year Google incorporated itself.

Looking more closely at the list of this year’s 10 take-privates, we would note that only one company actually managed to get an above-market valuation. (That would be Vista Equity Partners’ $644m acquisition of Greenway Medical Technologies, which went off at 4.7x trailing sales.) Four other companies said goodbye to Wall Street at 1x sales or lower. On average, the significant LBOs of 2013 have gotten done at a median valuation of 2.1x trailing sales, a full turn lower than the broad market multiple for the 50-largest transactions of 3x trailing sales.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Barracuda sets up for an IPO that should go swimmingly

Brenon Daly

Contact: Brenon Daly

The holdout is over for Barracuda Networks. After a decade of steady expansion behind closed doors, the closely held information security (infosec) vendor is now set to step onto the public market. And it will be a big step by a big company: At about a quarter-billion dollars in revenue this fiscal year, Barracuda is roughly twice as large as other infosec firms that have come public recently.

Barracuda shipped its first product – a firewall – back in 2003. It has used a half-dozen or so acquisitions since 2006 to move into other infosec markets, as well as expand into storage. The company’s core security business represents about two-thirds of overall revenue, with the remaining revenue coming from its faster-growing storage business. It sells primarily to SMBs, having rung up some 150,000 customers.

Barracuda’s planned offering comes at time when Wall Street is particularly bullish on infosec IPOs. Most notably, FireEye doubled in its debut last month on its way to creating almost $5bn in market value. That’s a head-spinning valuation for a company that will do about $150m in sales this year.

But we wouldn’t necessarily hold out FireEye, with its triple-digit growth rates and enterprise focus, as a comparable offering to Barracuda. Instead, we might look back to the IPO four years ago from another appliance-based, multiproduct infosec provider, Fortinet.

Although that company is about twice as big as Barracuda, it is growing at just half the rate of Barracuda. Currently trading at about the midpoint of its 52-week range, Fortinet is valued at roughly $3.5bn, or about 6x this year’s sales. Putting that multiple on Barracuda, we come up with a rough valuation of about $1.5bn for the company. That’s probably a baseline valuation for Barracuda as it hits the market.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Tech buyers play defense, push Q3 tech M&A spending to near record

Brenon Daly

Contact: Brenon Daly

Tech M&A spending in the just-completed third quarter edged toward a post-recession record, as buyers announced more blockbuster transactions than they have in any quarter since the credit crisis ended. This summer’s combination of slowing growth rates and rising interest rates lent an urgency to big bets from a number of tech giants that might have otherwise let deals slip away from them. In the July-September period, we tallied a post-recession record of 15 transactions valued at more than $1bn. That means that almost half of the 10-digit deals announced so far in 2013 were printed just in the past three months.

The surge in big-ticket transactions helped push aggregate Q3 spending to just under the highest quarterly levels since the end of the recession. Overall, buyers spent $71.8bn on 800 purchases of tech, telco and Internet companies around the globe in Q3, according to The 451 M&A KnowledgeBase. That boosted M&A spending levels in just the first three quarters of 2013 higher than full-year levels in both 2010 and 2012. Further, 2013 is tracking to basically match 2011 as the highest amount of annual spending on tech acquisitions since the credit crisis.

Yet, even as spending neared record levels, the tech industry showed its age. Deal flow in the July-September period featured big moves – large-scale, cost-driven consolidations as well as significant divestitures – that come in a maturing industry. Many of the biggest prints in the quarter appeared to be ‘defensive’ deals, which also came through in the below-market multiples paid in eight of the 10 largest Q3 transactions.

Meanwhile, on the other side of the M&A spectrum, we would note that not a single VC-backed startup sold for more than $1bn this summer. Further, just one VC portfolio company (Tumblr) has hit that threshold in 2013, compared with four startups that pocketed 10-digit exits in 2012.

Another sign of the ‘graying’ of tech is that there are fewer buyers and less activity in the market. The number of deals announced so far this year is tracking to its lowest level since the depth of the recession. The number of transactions announced in the past three months has dropped 13% compared with the same period in 2012. The decline continues a slide that we have seen all year long. In fact, spending in every single month in 2013 has been lower than the corresponding month in 2012. A full report on Q3 M&A activity and valuations will be available for subscribers on the 451 Research website tomorrow.

Recent quarterly deal flow

Period Deal volume Deal value
Q3 2013 800 $72bn
Q2 2013 751 $46bn
Q1 2013 785 $64bn
Q4 2012 851 $64bn
Q3 2012 912 $39bn
Q2 2012 916 $44bn
Q1 2012 918 $34bn
Q4 2011 904 $44bn
Q3 2011 969 $64bn
Q2 2011 980 $76bn
Q1 2011 919 $45bn

Source: The 451 M&A KnowledgeBase

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

A round trip for Active Network shares

Ben Kolada

Contact: Ben Kolada

After a little more than two years of trading on the NYSE, registration and events management software vendor Active Network is leaving the public eye in a $1bn take-private by Vista Equity Partners. The deal carries a fairly paltry valuation, and only returns the company’s share price to basically the same level where it sold them in the IPO. And that was when Active Network’s revenue was roughly one-quarter smaller than it is today.

Vista is paying $14.50 per share in cash for Active Network, valuing the company’s equity at $1.05bn. Including the assumption of cash and capital lease obligations, the deal values Active Network at 2.1x trailing sales. For comparison, the company’s much smaller competitor Cvent is currently valued much higher at $1.4bn, or 14.5x trailing revenue. Citi Capital Markets advised Active Network, while Bank of America Merrill Lynch advised Vista Equity Partners.

We’d argue that the subpar valuation is the combination of meager growth and an inability to meet financial expectations. Wall Street expects Active Network to grow revenue 8.5% this year, to about $455m. Although that’s from a much larger base, it’s still a fraction of the 30% growth analysts expect Cvent to record. Further, financial expectations for Active Network are far from certain, given that the company has repeatedly issued results below its own estimates.

In a roundabout way of acknowledging the company’s public troubles, Vista took a charitable view of the per-share premium, noting that its offer is 111% above the average year-to-date closing price for Active Network. A more grounded view, however, shows the offer only matches Active Network’s $15 IPO price in May 2011, and represents a more common 27% premium to its closing share price Friday.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Applied Materials reapplies cost-cutting M&A strategy

Contact: Tejas Venkatesh Scott Denne

In its biggest deal ever, Applied Materials is acquiring fellow chip manufacturing equipment vendor Tokyo Electron for $9.3bn in stock. The rationale for the transaction lines up closely with Applied’s cost-cutting motive in its $4.9bn purchase of Varian Semiconductor, and comes at a time when we expect limited revenue growth in the semiconductor equipment market.

In buying Tokyo Electron, Applied is projecting a $60m decrease in its quarterly operational expenses after a year and $120m by the third year following the close. Applied achieved similar (although smaller) results when it acquired Varian in the summer of 2011. Then Applied promised to shave $12m-16m off its quarterly expenses, and though it’s a quarter away from the deadline, its operating expenses came in at $556m last quarter – $14m lower than what Varian and Applied put up before the deal.

In a survey this month by ChangeWave Research, a service of 451 Research, 16% of semiconductor vendors indicated that their capital budgets would decrease for the next quarter, versus just 2% who expected an increase. That makes it an opportune time for Applied Materials to make a deal focused on cutting costs.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Extreme Networks doubles down with Enterasys

Contact: Tejas Venkatesh

In its first acquisition of a company in more than a decade, Extreme Networks announced the reach for a company its own size: fellow Ethernet switch vendor Enterasys Networks. While the $180m deal may seem aggressive at first glance, we see it more as an opportunistic buy designed to better compete in a market dominated by larger companies like Cisco and Huawei.

The deal values Enterasys, which generated $340m in sales for the year ended June 2013, at just 0.5x trailing sales. That’s a bargain price compared to the 1.2x multiple that Extreme currently garners on the public market. Further, the deal price is less than half of what Enterasys received in its takeover, when buyout firms Gores Group and Tennenbaum Capital Partners acquired the company in November 2005.

As a result of the deal, Extreme’s topline approximately doubles, and this should help the company compete better with larger firms, especially in winning large contracts. The two companies have almost no customer overlap, meaning the combined entity will instantly have more market breadth and a stronger sales force. We will have a full report on the transaction our next Daily 451 newsletter.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Much more to do at Dell

Brenon Daly

Contact: Brenon Daly

After a tortuous, acrimonious and sometimes litigious seven-month process, Dell shareholders today approved the proposed $24.6bn take-private of the IT vendor. Now comes the hard part for the folks behind the third-largest tech leveraged buyout (LBO) in history: actually changing the trajectory at Dell.

We say that because the LBO doesn’t actually change much at the company. For the most part, the LBO is a financial event, rather than a strategic one. As a private company, Dell is simply going to continue plodding along its already planned transformation from ‘box maker’ to (ideally) a strategic supplier of IT products and services.

To be clear, however, this is not a new development at Dell. The handful of priorities that it has highlighted for its life as a private company – such as expanding its enterprise business, pushing further into emerging markets and redoubling its commitment to its sales channel – are all ones that it has put forward to shareholders since at least 2008. Dell would counter that its new ownership structure, with chief executive Michael Dell owning three-quarters of the company, will allow them to move quicker on that strategy.

That may be so, but we might suggest that it skims over the difficulties for any 110,000-employee company (public or private) to transform itself. After all, Dell has been steadily and consciously looking beyond its PC and laptop business for nearly the past half-decade, with limited success. In fiscal 2008, that segment contributed 61% of total Dell revenue, but that portion has only dropped to about 54% now.

And that’s despite spending more on M&A than it ever had in its history. Since 2006, the company has averaged about five acquisitions per year, according to The 451 M&A KnowledgeBase . Altogether, it has spent more than $12bn to get into new markets, including storage (EqualLogic, Compellent), services (Perot Systems), networking (Force10) and security (SonicWALL, SecureWorks). It’s also relevant to note for the soon-to-be-private Dell that shareholders footed the bill for that shopping spree.

Yet even as Dell has added all those new businesses – to say nothing of the collective billions of dollars in revenue from the acquired companies – it has not been able to grow. In fact, as the IT vendor gets set to step off the Nasdaq and go behind closed doors, it is going to be smaller and less profitable than it was before it kicked off its multibillion-dollar M&A program.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Will Microsoft and Nokia make for a ringing success?

Brenon Daly

Contact: Brenon Daly

In an acquisition that effectively formalizes a partnership of two and a half years, Microsoft plans to hand over $5bn for Nokia’s phone business. Additionally, it announced a $2.2bn agreement to license the Finnish company’s patents and mapping technology. Taken together, the moves mean that Microsoft – in its efforts to make the leap from the PC market to the much broader mobile world – has now tried all three of the corporate development strategies: buy, build and partner.

And yet so far, the results of that effort remain underwhelming. In an August survey by ChangeWave Research (a service of 451 Research) just 9% of corporate respondents indicated they planned to purchase a Windows Phone-powered device in the fourth quarter of this year. Microsoft’s ranking was dead last among the mobile OS providers. Even BlackBerry, which is fading dramatically, drew a level of support that was three times higher than Windows Phone.

Nor does the addition of Nokia, when the deal closes early next year, appear likely to bump up Microsoft’s standing among corporate mobile-device buyers. Just 7% of respondents to the ChangeWave survey indicated they planned to buy a Nokia device in Q4. That was the lowest standing among the six specific vendors included in the ChangeWave survey.

Obviously, Microsoft’s purchase and license agreements with Nokia extend far beyond the immediate timeframe covered in the ChangeWave survey. But even as we look ahead a year or more, we don’t necessarily see the transaction doing much to establish Microsoft as more than a distant fourth-placed mobile OS vendor.

For starters, there’s Microsoft’s mixed record on hardware, including its recent $900m write-off because it hasn’t sold anywhere near as many Surface tablets as it expected. And even when we look at precedent transactions where software companies have reached for hardware vendors (even those with solid underlying IP), the returns have been low. One dramatic example from the enterprise world: Oracle has struggled to get out from under the billions of dollars of hardware that it inherited when it acquired Sun Microsystems.

Even more relevant to the Microsoft-Nokia transaction, Google hasn’t radically altered the fortunes of Motorola’s smartphones since it acquired that business in a deal that was announced two years ago and closed May 2012. Yes, the Android OS continues to gain momentum for all device makers. But specifically for Motorola, the percentage of corporate buyers who plan to purchase a Motorola device in the coming quarter has dropped almost uninterruptedly in the year that Google has owned the device maker, according to ChangeWave research.