Category: investment banking

Social software M&A on the uptick in 2011

Contact: Brian Satterfield

As more businesses leverage social networking websites for marketing and customer support purposes, many big-name buyers are finding social media software vendors to be increasingly attractive targets. The number of deals in the sector rose more than 150% in 2011 from 2010, while spending during that same period soared more than five-fold from $75m to $389m.

The bulk of 2011 social software spending came in March, when salesforce.com forked over $326m for Radian6, a Canadian startup that had raised just $6m. Radian6 was both the CRM giant’s largest deal as well as the priciest transaction ever in the sector. Salesforce.com bought Radian6 in order to add social media monitoring features to a number of products in its portfolio. On a smaller scale, we saw similar purchases around that same time by Meltwater Group, which added JitterJam for $6m, and call-center software maker KANA Software, which reached for Overtone.

But enterprise software providers aren’t the only takers in the social software world. Many tech companies that have partial or completely social business models got in on the action, presumably in order to track activity on their own networks. Twitter, for instance, picked up social media monitoring software maker BackType, while Google bought a similar company called PostRank.

PE firms play small ball

Brenon Daly

Contact: Brenon Daly

After years of writing multibillion-dollar checks in some of the largest tech transactions, private equity (PE) shops dramatically scaled back their purchases in 2011. The single biggest deal last year (The Blackstone Group’s $3bn take-private of healthcare technology vendor Emdeon) only ranked 15th among the largest transactions in 2011.

It was the first time PE firms haven’t have a hand in at least one of the year’s 10 largest deals since 2008. Even in the recession-wracked year of 2009, one buyout slotted into the top 10. And in 2010, when the economy appeared to be solidly recovering and the credit markets were more welcoming, PE firms accounted for fully three of the 10 largest transactions of that year. But last year, the buyout barons were overwhelmed by their corporate rivals, who are flush with cash.

A continuing M&A recovery in 2011

Brenon Daly

Contact: Brenon Daly

The choppiness that was felt in the overall M&A market in 2011 also came through in the totals for the year. While the number of transactions hit a five-year high, spending on tech deals in 2011 didn’t necessarily keep pace. The total value of transactions announced last year around the globe rose 17% to $219bn. Still, the increase in 2011 represented the second straight year of higher M&A spending following the dramatic decline in the recession of 2008-2009. However, the total for 2011 is only about half the value of deals announced in the previous years of the tech bull market.

Overall, dealmaking in 2011 started slowly, but then dramatically picked up in late spring and early summer. But that rebound stalled as uncertainty around European stability pushed out acquisitions, or canceled them altogether. The concerns knocked M&A spending in November to the lowest monthly level seen since the depths of the recession in February 2009. And while spending did rebound in December to a more typical level of nearly $20bn, the final few months of 2011 were hardly a robust time for significant transactions. Just one of the 10 largest deals of last year was announced in the final quarter of 2011.

And the Golden Tombstone goes to …

Brenon Daly

Contact: Brenon Daly

It’s time to once again hand out our annual award for Tech Deal of the Year, as voted by corporate development executives in our recent survey. For the second straight year, the voting came down to a tight race between two transactions. For 2011, Google’s planned purchase of Motorola Mobility just edged SAP’s reach for SuccessFactors. (Last year, Intel’s rather unexpected acquisition of McAfee slightly topped Hewlett-Packard’s takeout of 3PAR following a drawn-out bidding war.)

Both of the deals in the running for the 2011 prize certainly would have been worthy recipients of the Golden Tombstone. Google’s all-cash $12.5bn purchase of Motorola Mobility is more than the search engine has spent on its more than 100 other acquisitions and, beyond that, stands as the largest tech transaction (excluding telecommunications) since mid-2008. (Specifically, it is the largest deal since HP’s $13.9bn pickup of services giant EDS, which was voted the most significant transaction of 2008.) Meanwhile, SAP is paying an eye-popping 11 times trailing sales for SuccessFactors. With a price tag of $3.5bn, the deal is the largest-ever SaaS acquisition, more than twice the size of the second-place transaction.

AT&T’s loss is Verizon’s gain

Ben Kolada

Contact: Ben Kolada

In the land of multibillion-dollar telco mergers, sometimes the piecemeal approach is more effective than a one-and-done deal. AT&T attempted to leap over the competition with its proposed $39bn acquisition of T-Mobile USA; however, the world’s largest telecom company fell flat on its face. In failing to secure the T-Mobile takeover, AT&T is on the hook for a hefty $3bn cash breakup fee and must share spectrum in 128 cellular markets with its still-independent competitor. The spectrum loss is of particular irony, considering the primary driver for the T-Mobile purchase in the first place was the target’s spectrum assets.

Rather than pursue another long-shot acquisition, AT&T should focus on smaller spectrum purchases. That’s precisely what its competition has done. While AT&T spent months attempting to persuade politicians and federal regulators to approve the T-Mobile deal, which would have combined the second- and fourth-largest wireless carriers in the US, Verizon was dutifully seeking out smaller spectrum buys. Just this month, the company announced a pair of spectrum transactions worth a combined total of nearly $4 billion – the same price as the pretax charge AT&T will take in the fourth quarter (that charge includes the $1bn book value for the spectrum agreement with T-Mobile). Meanwhile, AT&T still hasn’t received FCC approval for its $1.9bn acquisition of certain Qualcomm spectrum licenses, which was announced back in December 2010.

Survey says: Tech M&A is likely to pick up in 2012

Brenon Daly

Contact: Brenon Daly

After a summer of discontent, the environment for tech M&A in the coming year once again appears welcoming, according to 451 Research’s annual survey of corporate development executives. More than half of the company dealmakers we surveyed indicated they expected to be busier in the coming year than they had been in the previous one. The number who predicted an increase actually ticked up slightly to 56% this year from 52% in our previous survey.

Meanwhile, when we asked about the overall climate for M&A, three times the number of corporate development executives projected it would get better rather than worsen in the coming year (43% vs. 14%). The sentiment is slightly more bullish than the result last year, when actual M&A spending totals rose for the second straight year following the dramatic drop-off during the recession.

The robust outlook for dealmaking in 2012 is even more remarkable when we compare it with the results from a special ‘flash survey’ we sent out in early August. At that time, the equity markets were sliding to their lowest levels in a year as volatility hit its highest level since early 2009. (It was also the time when the US got its AAA credit rating clipped by Standard & Poor’s, a downgrade that had been largely unimaginable before the recession.) Back in August, just one-third (32%) of respondents indicated they would be busier in the back half of 2011 compared with the first half of the year. We’ll have a full report on the survey results – including the outlook for M&A valuations, as well as which deal got voted as the most significant one in 2011 – in tonight’s Daily 451.

Projected change in M&A activity

Period Increase Stay the same Decrease
December 2011 for 2012 56% 30% 14%
December 2010 for 2011 52% 41% 7%
December 2009 for 2010 68% 27% 5%
December 2008 for 2009 44% 33% 23%

Source: 451 Research Tech Corporate Development Outlook Survey

Proofpoint refills the IPO pipeline

Brenon Daly

Contact: Brenon Daly

Wedged between the strong debuts this week of two tech companies, Proofpoint has put in its paperwork to refill the IPO pipeline. The subscription-based email security vendor filed for a rather small $50m offering, which is being led by Credit Suisse and Deutsche Bank. Earlier this week, Jive Software hit the market well above its expected price while Zynga raised a cool $1bn as it priced its offering at the top end of its range.

Founded in 2002 by a former Netscape executive, Proofpoint has expanded beyond its core email security. Most recently, we noted that the company has begun to position itself as a full compliance platform, complete with email discovery and litigation support. While Proofpoint’s technology is solid, Wall Street may be left wanting a bit more from its financials.

For starters, Proofpoint has never printed black numbers, and has wrung up a total of $155m in accumulated deficit. Meanwhile on the top line, the company increased revenue a less-than-stellar 27% through the first three quarters of 2012. That compares to 43% growth in sales over the same period at Imperva, the most recent security vendor to hit the public market. Proofpoint plans to trade on the Nasdaq under the ticker PFPT.

Lam’s novel move

Contact: Thejeswi Venkatesh, Brenon Daly

At a time when chipmakers are lowering their outlook, citing the economic downturn and the flooding in Thailand, semiconductor equipment maker Lam Research on Wednesday announced its plan to acquire Novellus Systems for $3.3bn in equity. The deal comes a little over a month after Novellus’ primary competitor and industry leader Applied Materials Inc closed its $4.9bn acquisition of Varian Semiconductor. Novellus stockholders will receive 1.125 shares of Lam for each share they own, representing a per-share price of $44.42. Novellus hasn’t traded that high since 2002.

Lam’s offer values Novellus at 7.9 times trailing EBITDA, which is only about half the 14.3x valuation that Varian received in May. (Similarly, Novellus is being valued at only about half the price-to-sales multiple of Varian, 2x trailing compared with 4x trailing for its rival.) However, we believe the deterioration in market conditions and the fact that Novellus is coming off two years of operating losses account for the lower multiple. In any case, the market seems to back the price Lam is planning to pay because shares are largely unchanged on the announcement. Goldman Sachs advised Lam, while Bank of America Merrill Lynch banked Novellus. This is Lam’s first notable purchase since 2007, when it bought EZ Holding for $568m.

Europe: Not the lost continent

Brenon Daly

Contact: Brenon Daly

Even as Europe appears increasingly likely to splinter under the weight of its unsustainable debt loads, there’s still a fair amount of shopping on the Continent. In fact, the $68bn worth of transatlantic transactions so far this year is the highest level in four years and equal to the combined value of European deals done over the previous two years. (To be clear, we’re talking about transactions where either the buyer or seller is headquartered in a western European country.)

Rather surprisingly, four of the 10 largest deals announced so far in 2011 have European accents. In three cases, the sellers were based in Europe (Autonomy Corp, Skype, Kabel BW) while SAP comes in as the sole big buyer, thanks to last week’s $3.65bn purchase of SuccessFactors. Even more surprisingly, two of those mammoth transactions have been announced since the debt crisis really took hold on the Continent.

If European leaders can move to stabilize the region – granted, that’s a big ‘if’ – then tech acquisitions should accelerate from their already high rate, at least according to the view of some dealmakers. Fully two-thirds of the more than 100 corporate development executives we surveyed over the past week said M&A activity will increase if Europe shows progress in ‘resolving or containing’ its debt crisis.

Recent Blue Coat shareholders no longer in the red

Brenon Daly

Contact: Brenon Daly

Anyone who bought shares of Blue Coat Systems over the past half-year breathed a sigh of relief after the recent buyout of the old-line security vendor. Thoma Bravo’s bid of $25.81 for each share means that buyers since May are all above water. (The offer represents a 48% premium over the previous close and is almost twice the price that Blue Coat stock fetched on its own back in August.)

But there’s another longtime shareholder that’s probably plenty relieved as well: Francisco Partners. Recall that the buyout firm, which had previously invested in the company, also loaned Blue Coat $80m to help it pay for its purchase of Packeteer in 2008. Francisco took convertible notes, which came at an exercise price of $20.76. Although that was roughly where the stock was trading in the spring of 2008, it finished out the year in the single digits as the recession deepened.

More recently, Blue Coat had been trading below the exercise price for the past four months, hurt by three consecutive revenue shortfalls and turnover in the chief executive office. But with Thoma Bravo’s take-private, which is slated to close in the first quarter of 2012, Francisco Partners will pocket a tidy return. On paper, the firm will book a $19m profit on the convertible notes, equaling a roughly 25% gain. That’s certainly not the biggest gain Francisco Partners has ever put up, but given that the firm spent a fair amount of time underwater on its holding, it’s not a bad outcome at all. And it certainly beats the return from just plunking the money into the broad market, which declined about 10% over the period.