Category: investment banking

‘Progress-ing’ in a restructuring

Ben Kolada

Contact: Ben Kolada

Continuing its yearlong restructuring, Progress Software is selling its Apama complex event processing (CEP) assets to Software AG, effectively unwinding its 2005 acquisition of the startup. Although asset sales have become particularly popular and Progress has certainly been on a corporate diet lately, this move wasn’t widely expected in part because Progress had seemed to indicate that Apama was part of its core business.

In April 2012, Progress announced a restructuring plan that, among other moves, would refocus on its core OpenEdge, DataDirect and Apama products. However, the company has since had a change of heart regarding Apama. In announcing the divestiture, Progress said Apama’s target market of Wall Street and big telcos, as well as its deployment and sales model, differ significantly from Progress’ application development platform, which targets the midmarket. (We note that Progress is retaining Apama’s core decision analytics capability.)

The deal follows Progress’ sale of 10 product lines during the two previous quarters. Terms weren’t disclosed. (For the record, Progress paid $25m for Apama in April 2005.) According to our understanding, Software AG is paying less for Apama – both on an absolute and relative basis – than TIBCO paid in a directly comparable CEP deal earlier this week, when it reached for StreamBase Systems. We’ll have a longer report on this acquisition in an upcoming Daily 451.

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The value of information

Ben Kolada

Contact: Ben Kolada

In its largest-ever acquisition, IHS is paying $1.4bn for Southfield, Michigan-based automotive data and information provider R.L. Polk & Co. Consumers may know the company better as the provider of the CARFAX vehicle information product. The deal is a significant move to grow a relatively young IHS division.

While IHS Automotive was launched just two years ago, Polk was founded in 1870, nearly four decades before Henry Ford’s first Model T hit the road. The company today provides online market research and a database of VINs for the automobile industry. Its Polk division accounts for about 40% of revenue. The remainder of revenue comes from its CARFAX division, which provides an online database of vehicle history information for used car dealers and consumers.

IHS claims growth potential was the rationale for this acquisition. Although Polk’s total annual revenue has only grown in the mid- to single-digit range, its CARFAX product has recorded ‘solid’ double-digit growth annually. Meanwhile, IHS says CARFAX is only 20-30% penetrated in the US. IHS also sees particular upside in international markets, where Polk currently generates just 12% of its sales.

IHS is paying $1.4bn (90% in cash and 10% in stock) for Polk, valuing the target at 3.5x its annual revenue and approximately 14x its adjusted EBITDA. (IHS disclosed that Polk generated adjusted EBITDA in the mid-20% range.) Evercore Partners advised Polk, while M. Klein and Company advised IHS.

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For US tech IPOs, precious little new blood amid the larger bleed-out

Brenon Daly

Contact: Brenon Daly

Over the past month it’s been ‘one on/one off’ for publicly traded marketing automation vendors. In mid-May, we saw Marketo debut on the Nasdaq. (If rumors are to be believed, incidentally, Marketo only made it to market after stiffarming some would-be buyers.) On the other side, earlier this week we saw ExactTarget announce plans to depart the NYSE, selling for an industry-record $2.5bn a little more than a year after its own IPO.

Leaving aside the vast gap in value left by the two events – Marketo currently trades at less than one-third of ExactTarget’s terminal value – at least there’s some replacement in this sector. That isn’t true for most of the tech industry. In terms of the overall number of tech companies on US exchanges, there’s been precious little fresh blood to offset a continual bleed-out.

Looking broadly at the enterprise tech market so far this year, we’ve tallied a half-dozen IPOs, with half of those coming in the past month alone. In addition to Marketo, May also saw the listings of ChannelAdvisor and Tableau Software. That trio joined Marin Software, Model N and Rally Software Development as the Class of 2013 so far.

So that’s six new entrants to the ranks of US publicly traded tech companies, an average of about one IPO each month this year. (And keep in mind, this rate is post-JOBS Act, which supposedly made it easier for companies to come public.) Against those new arrivals, we have seen some 20 US public companies acquired so far this year, according to The 451 M&A KnowledgeBase.

That rate equals three tech companies erased from US exchanges for every one that joins. Many of these deals are taking major companies – which, in some cases, have traded for a decade or even longer – off Wall Street: Dell, BMC, Acme Packet, Websense and others. The debutantes just can’t keep pace with the departures.

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Mellanox buys again for optical interconnect portfolio

Contact: John Abbott

Less than a month after Mellanox Technologies agreed to spend $82m in cash to acquire silicon photonics component specialist Kotura, the Israeli interconnect firm is buying again. It will pay $47.5m in cash for IPtronics, a Danish optical interconnect component supplier with which it already does business. The deal, already approved by both boards, should close in the second half of the year.

IPtronics is a fabless semiconductor firm with headquarters in Copenhagen and offices in Menlo Park, California. It has 20 employees. The company produces low-power, high-speed analog chips designed for parallel optical interconnects aimed at the enterprise sector, with 10G, 40G and 100G data rates. These include vertical-cavity surface-emitting laser (VCSEL) drivers, modulator drivers and transimpedance amplifiers. IPtronics has shipped roughly four million units so far. Its fab partner is ST Microelectronics.

Mellanox says the acquisitions of Kotura and IPtronics are highly complementary. IPtronics components are already integrated into Mellanox’s server and storage interconnects. But as competition mounts and the speed of technical innovation in optical interconnects increases, Mellanox needs to be able to own all of the IP required to deliver complete end-to-end enhanced data rate InfiniBand and 100GigE offerings, which are expected to reach the market around 2015. Large server and storage customers are looking to use 100Gbps connections for the mid-planes of blade-chassis architectures and for hooking up 1U servers and storage systems.

For that, Mellanox needs to have control over all of the parts, from PCI Express through NIC/HCA, cables and switches, and to the other side of the storage or server system. Specifically, IPtronics provides Mellanox with analog transceiver technology that will enable it to support current VCSEL fiber optics and future silicon photonics: VCSEL starts to run out of steam at 100GB/sec speeds, while silicon photonics provides a roadmap to 400Gb/sec and 1TB/sec pipes. IPtronics components also bridge the gap between optical and electrical interfaces.

In March 2012, Sumitomo Electric Device Innovations bought the VCSEL component and transceiver product lines of EMCORE for $17m in cash – assets EMCORE had previously acquired from Intel in 2008. Other comparable deals include FCI’s pickup of the assets of MergeOptics in February 2010 for an undisclosed amount, Emerson Electric’s acquisition of Stratos International in May 2007 for $118m, and JDS Uniphase’s takeout of E20 Communications in May 2004 for $60m. There’s also an element of uncertainty in this sector, with one particularly aggressive player – Agilent spinoff Avago – fighting patent-infringement lawsuits against all of its competitors, including both Mellanox and IPtronics, as well as Emerson, FCI, Finisar, JDS Uniphase and Methode Electronics.

Mellanox’s financials continue to look strong, despite a few quarters of missed expectations recently. In fiscal 2012, its revenue came in at $501m, up 93% year over year; Q1 2013 revenue was $83m and the guidance for Q2 is $92.5-97.5m. The company has more than $400m in cash and short-term investments. However, Mellanox is currently delisting itself from the Israeli stock exchange following some conflicts with institutional investors in its home market, which has dragged down its share price. It will continue to trade on the Nasdaq.

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A market-moving marketing move

Brenon Daly

Contact: Brenon Daly

In the largest-ever transaction in the rapidly emerging marketing automation industry, salesforce.com said on June 4 it will hand over $2.5bn in cash for ExactTarget. The deal represents a significant bet by the SaaS kingpin, which has talked about cross-channel marketing becoming a $1bn business in the coming years. Salesforce.com will nearly clean out its coffers to cover its purchase of ExactTarget, which is three times the size of salesforce.com’s second-largest deal.

Under terms, salesforce.com will hand over $33.75 for each share of ExactTarget. That represents the highest-ever price for the 13-year-old marketing automation vendor, which went public in March 2012 at $19. (J.P. Morgan Securities led ExactTarget’s IPO and advised the company on its sale. Bank of America Merrill Lynch worked the other side.) The deal is expected to close by mid-July.

At an enterprise value of $2.4bn, ExactTarget’s valuation of roughly 7.6 times trailing sales splits the difference between the two previous largest transactions in the marketing automation space. In December 2012, Oracle paid an uncharacteristically rich 9.7 times trailing sales for Eloqua, and Teradata paid 6.5 times trailing sales for Aprimo in December 2010, according to the 451 Research M&A KnowledgeBase. (For its part, rival Marketo, which salesforce.com and others were rumored to have looked at last fall, trades at nearly twice ExactTarget’s multiple.)

With the purchase of ExactTarget, the three largest deals salesforce.com has done have all been aimed at expanding the company’s marketing offering. It picked up Buddy Media in mid-2012 for $689m for its agency relationships after spending $326m on social media monitoring startup Radian6 in March 2011. But don’t look for any more deals in that space or any other from salesforce.com soon. During a call discussing the ExactTarget purchase, CEO Marc Benioff said salesforce.com will be on ‘vacation’ from M&A for the next 12-18 months.

In ICE-NYSE deal, a shark swallows a whale

Brenon Daly

by Brenon Daly

For all of the talk about the disruptive forces that have reshaped the tech landscape through M&A, the changes – at least at the high end of the market – have been largely incremental. Just take a look at deal flow so far this year. We’ve seen a bit of big-ticket telco consolidation as well as a pair of multibillion-dollar take-privates, the largest of which would see the current CEO play a leading role in not only the transaction itself but also the operation of the company after the close. It’s hardly dramatic stuff.

Certainly, we would argue that not one of those deals comes anywhere close to the upheaval embodied by the IntercontinentalExchange’s (ICE) planned acquisition of NYSE Euronext. The deal, which was backed by NYSE shareholders today, may well be the ultimate example of a startup gobbling up an established vendor.

For starters, the roles in the transaction are flipped from what we would expect in a typical tech deal. (Indeed, the NYSE has been a busy buyer in recent years, expanding into electronic trading platforms and consolidating old-line exchanges both in the US and abroad via M&A.) Consider the fact that ICE is barely more than a decade old while the fabled NYSE traces its roots back to 1792. And while ICE is the buyer, it is less than half the size of the NYSE, or the ‘Big Board’ as it is known on Wall Street.

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A mixed May for M&A

Brenon Daly

Contact: Brenon Daly

Continuing the M&A trend we’ve seen so far this year, tech buyers in May either bought big or bought nothing. Spending on tech transactions across the globe this month ticked about 16% higher than the same month last year, although it was lower than both May 2011 and May 2010.

This month’s spending totals were boosted by three deals valued at more than $1bn, headlined by the planned $6.9bn take-private of BMC Software. (The buyout, which was spurred by an activist hedge fund, is the largest infrastructure software transaction in a half-decade.) With the BMC deal and the second-largest transaction of the month (Fidelity National Financial’s $2.9bn reach for mortgage software vendor Lender Processing Services), May accounted for two of the five largest tech deals announced so far in 2013.

However, overall M&A activity remained muted, with the number of transactions announced in May dropping about 15% compared with the same month of the two previous years. Once again in May, monthly deal volume failed to crack 300 transactions, the rough monthly average for tech deals in 2010 and 2011. That has left year-to-date deal volume levels down a significant 14% compared with the start of each of the two previous years.

2013 activity, month by month

Period Deal volume Deal value % change in spending vs. same month, 2012
May 2013 275 $18.4bn Up 16%
April 2013 251 $32.8 Up 129%
March 2013 219 $4.4bn Down 76%
February 2013 246 $47.6bn Up 296%
January 2013 303 $10.7bn Up 155%

Source: The 451 M&A KnowledgeBase

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Dassault continues to acquire for growth

Ben Kolada

Contact: Ben Kolada

Continuing its search for external growth opportunities, 3-D modeling software vendor Dassault Systèmes says it is paying $205m for manufacturing software provider Apriso. The deal pushes Dassault into the manufacturing operations management software industry and provides cross-sell opportunities for both companies.

The all-cash transaction values Apriso at 4.1x last year’s sales. An Apriso press release earlier this year noted that sales growth over the past seven years exceeded 20% on a compound annual growth rate (CAGR); software revenue specifically grew at a CAGR of 31% over the same period. Last year, software represented 65% of total revenue, with services accounting for the remaining 35%. Jefferies & Company advised Apriso on its sale.

The deal is primarily a product expansion for Dassault, making manufacturing operations software available to customers that are currently using its DELMIA manufacturing and production modeling software. With Apriso, Dassault also expands its presence in a variety of industries, such as consumer goods, packaged goods, high tech, life sciences, transportation and mobility, aerospace and defense, and industrial equipment.

Beyond the sales rationale, Dassault also appears to be seeking more outlets to further its growth. We previously wrote that, although the greater European economy continues to struggle, Dassault was able to announce a pair of acquisitions in April due in part to the fact that the company is still growing total revenue. With this purchase, its fourth this year, Dassault has already tied the number of M&A moves it made in its most acquisitive year, 2011. And with a large war chest – nearly $2bn (€1.5bn) in cash and short-term investments at the end of March – Dassault has enough firepower to keep announcing expansion acquisitions.

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High water in the channel

Brenon Daly

Contact: Brenon Daly

In an unexpectedly strong debut, ChannelAdvisor created nearly $400m in market value in its IPO earlier this week. The 12-year-old company, which trades on the NYSE under the ticker ECOM, priced at the high end of its range and then shot up some 30% in its first session.

At the risk of bearishly mauling this bullish debut, ChannelAdvisor appears richly priced. With some 20.5 million (undiluted) shares outstanding, investors are saying the e-commerce channel advisory vendor is worth about $380m. That’s a steep valuation for a relatively small company (2012 revenue of just $54m) that’s only growing in the low-20% range and still has a negative ‘adjusted’ EBITDA figure, not to mention a net loss.

The roughly 7x valuation that ChannelAdvisor got in its IPO also looks pricey when compared with the value that a smaller rival got in its exit earlier this year. Back in February, channel intelligence sold to Google for $125m, which we understand worked out to about 4.5x trailing sales. Channel intelligence was roughly the same vintage as ChannelAdvisor, but only about half the size of the now-public company.

Still, it’s unusual for an IPO to trade at such a sharp premium to an M&A valuation, which should, theoretically, be higher because it reflects the full life value of a company. The gulf could indicate that either Google got a steal in its deal or that Wall Street may be paying too much for ChannelAdvisor.

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Same price but very different deals for Tumblr and Websense

Brenon Daly

Contact: Brenon Daly

It’s often said that tech M&A valuations are more art than science, a perspective that stood in stark relief thanks to a pair of transactions announced Monday morning. The deals, which have wildly different strategic underpinnings, involve companies at opposite ends of their corporate lifecycle but came in at the same price: $1bn.

On the one hand, we have a fairly staid take-private of a 20-year-old information security vendor with flatlining sales of slightly more than one-third of a billion dollars. On the other, we have a wildly popular blogging site that gets a multiple of nearly 100x its nascent sales as a faded Internet kingpin makes a highly speculative acquisition.

In the more conventional transaction, buyout shop Vista Equity Partners said it will hand over about $1bn for Websense. The offer values the Web content filtering vendor at loosely 3x sales. (That’s just slightly higher than the multiple that fellow private equity firm Thoma Bravo paid a year and a half ago for Blue Coat Systems, a ‘vintage’ technology company that also offered Web content filtering as part of its broader portfolio.) According to a recent survey of IT buyers by TheInfoPro, a service of 451 Research, Blue Coat was the top-ranked Web content filtering vendor, cited by 27% of respondents, followed by Websense at 22%.

And then, there’s Yahoo’s reach for Tumblr. The $1.1bn all-cash acquisition is Yahoo’s largest in about a decade. And while Tumblr has a heavy user base (about 300 million unique monthly visitors), it had only really begun generating revenue. The company has only about one-tenth the number of employees at Websense.

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