Category: investment banking

A December rebound in tech M&A

Brenon Daly

Contact: Brenon Daly

After three months of basically standing on the sidelines, tech dealmakers have stepped back into the market in a big way in December. During just the first week of the final month of 2011, the value of announced transactions across the globe hit $8.6bn, led by SAP’s announcement of the largest-ever SaaS deal with its $3.6bn purchase of SuccessFactors and Verizon’s mammoth $3.6bn reach for some excess wireless spectrum with its pickup of SpectrumCo.

To put that $8.6bn of deal value in December into context, consider this: it already equals the full-month total for September and is fully twice the amount of spending in November. But then, last month was particularly grim for M&A. In fact, spending in November sank to its lowest monthly level in more than two and a half years, which was the depths of the Great Recession. Further, the number of transactions in November (only 240) stands as the lowest of any month so far in 2011 and is roughly 20% below the typical monthly volume.

The Houses of Morgan are in demand for on-demand work

Brenon Daly

Contact: Brenon Daly

It turns out that the advisers for the largest-ever SaaS acquisition are also the busiest in terms of restocking the ranks of publicly traded subscription-based software companies. J.P. Morgan Securities, which banked SAP, and Morgan Stanley, which advised SuccessFactors, are upper left on the prospectuses of no fewer than five SaaS vendors currently in registration. Between them, the ‘Houses of Morgan’ have a fairly tight grip on the sector, leading the proposed IPOs of on-demand software shops including Eloqua, ExactTarget, Bazaarvoice, Jive Software and Brightcove.

As lead underwriters, the banks stand to pocket tens of millions of dollars in fees from the upcoming offerings. Additionally, they are likely to build on that initial relationship through other advisory services for the companies. For instance, J.P. Morgan co-led Taleo’s IPO in 2005 and, more recently, advised it on its $125m purchase of Learn.com. On an even bigger scale, Morgan Stanley led the IPOs of both RightNow and SuccessFactors and then advised them on their sales, a pair of deals that totaled a whopping $5bn.

SuccessFactors works the other side of the deal

Brenon Daly

Contact: Brenon Daly

In one of the quickest M&A turnarounds, SuccessFactors has gone from a seller to a buyer in just a matter of days. The human capital management (HCM) vendor announced over the weekend that it would be selling itself to SAP for $3.4bn in cash, the largest-ever SaaS deal. The ink was hardly dry on that transaction when SuccessFactors said on Tuesday that it will hand over $110m for Jobs2Web, a recruiting marketing platform with about 150 customers. (For the record, the mammoth SAP-SuccessFactors pairing is expected to close in the first quarter of 2012, while SuccessFactors’ purchase of the Minnesota-based startup should be done by the end of the year.)

The addition of Jobs2Web makes a great deal of sense for SuccessFactors, and in some ways, it shares some similarities to another deal earlier this year – salesforce.com’s $326m pickup of Radian6. In both cases, the startups added technology around mining social media sources and powerful analytics to expand the acquirer’s existing product portfolio.

There are even more similarities between Jobs2Web and Radian6, besides simply having numerals in their names. Both startups were founded far from any of the typical launch pads for tech companies. Jobs2Web has its headquarters in Minnetonka, Minnesota, while Radian6 was in the even more remote location of Fredericton, Canada.

But more importantly, both targets were incredibly capital efficient, each raising about $5m in VC on their way to a solidly valued exit. (Updata Partners was the sole institutional backer for Jobs2Web, which was advised in its sale by Raymond James & Associates.) According to our understanding, Jobs2Web garnered a valuation of roughly 6 times sales in its sale, while Radian6 was valued north of that.

SAP looks to SuccessFactors for success in the cloud

Brenon Daly

Contact: Brenon Daly

After struggling for years to build its own on-demand offering, SAP plans to buy its way into cloud-based software, handing over $3.65bn for SuccessFactors in what would be the largest-ever SaaS acquisition. The deal combines the largest ERP vendor, which has some 500 million users, with the fast-growing human capital management (HCM) provider. However, the acquisition, which is slated to close in the first quarter of next year, does face some challenges. J.P. Morgan Securities advised SAP on the transaction, while Morgan Stanley banked SuccessFactors, after leading its IPO four years ago.

SAP, which is 30 years older than SuccessFactors, has consistently pulled back the targets for its Business ByDesign SaaS suite since it started talking about it a half-decade ago. The difficulty in moving more quickly into a subscription-based software model is underscored by the fact that even after it drops $3.65bn to make SuccessFactors its cloud-based HCM product, SAP will continue to sell its own existing on-premises talent management offering. In fairness, we had our doubts about SAP’s previous big deal – the $6.1bn purchase of Sybase in mid-2010, which thrust the German giant into a host of new markets, including mobility and databases – but the early returns from that combination have been fairly solid.

However, when we compare SAP’s two most recent significant acquisitions, we can’t help but be struck by one gigantic discrepancy: valuation. SAP is paying a price-to-sales multiple that’s roughly twice as rich for SuccessFactors compared to the one it paid for Sybase. SuccessFactors is projected to do about $330m in sales in 2011, meaning it is garnering a rich 10 times revenue valuation, while Sybase traded at about 5x revenue. Obviously, SuccessFactors’ projected growth of 57% this year goes a long way toward explaining that premium, as does the fact that it’s a subscription-based business with 15 million subscribers. But even when compared with Oracle’s recent purchase of RightNow, which went off at about 6.6x trailing sales, SAP’s move seems pricey. We’ll have a full report on the transaction in tonight’s Daily 451.

Synopsys heats up EDA M&A with Magma buy

Contact: Thejeswi Venkatesh

After sitting out of the market for the first eight months of the year, Synopsys is suddenly on a buying spree. Having snapped up two smaller players in as many months, the largest electronic design automation (EDA) player has announced a definitive agreement to buy Magma Design Automation for $7.35 per share in cash, representing an enterprise value of $507m.

Size matters in the mature EDA market, and Synopsys claims that the combined company will be better able to invest more in R&D and further ‘technology acceleration’ in areas such as mobile chips. However, there are concerns about whether the deal will pass regulatory muster, given substantial overlap in product offerings. That explains the asymmetry in breakup fees – Synopsys will pay $13m more if it fails to close the acquisition than what Magma would pay if it backs out ($30m vs. $17m).

The deal values Magma at a trailing sales multiple of 3.6, based on reported revenue of $142m. That’s a handsome valuation compared to the 2.2x multiple that Mentor Graphics, the next-largest player after Magma, was offered by Carl Icahn in his unsolicited bid earlier this year. Synopsys will use existing cash ($230m of which is onshore) and debt to finance the deal. Qatalyst Partners banked Magma. We’ll have a full report on this deal in tonight’s Daily 451.

The new (unexpected) IPO hotspot

Brenon Daly

Contact: Brenon Daly

Forget Silicon Valley or New York or even Boston. The new tech IPO hotspot is a place that typically only gets flown over by investment bankers looking in the more traditional locations for the next companies trying to make it public. What’s the exotic and (potentially) lucrative new launch pad? Indianapolis. That’s right, the same city that has seen its football team go winless so far this season is putting up big points on the board for IPOs.

One company based in Indiana’s capital has already gone public this month, and another one has just followed up with a prospectus of its own. Angie’s List raised more than $100m in its mid-November offering. (The subscription-based service review site priced its shares at the high end of their expected range, and has seen them trade back down to around the offer price.) And just before Thanksgiving, ExactTarget filed its paperwork for a $100m IPO of its own.

Or, more accurately in the case of ExactTarget, the online marketer has re-filed for an IPO. It originally filed its S-1 almost exactly four years ago, but pulled that in mid-2009 as the equity market melted down. In the intervening years, ExactTarget has gotten substantially bigger. In fact, the company’s revenue in its most recent quarter ($55m in Q3) is higher than its total for the last year it was on file (full-year 2007 sales of $48m).

Another area it has bulked up: its underwriting team. Although ExactTarget originally went with a full slate of midmarket banks to bring it public, it now has bulge-bracket firms J.P. Morgan Securities and Deutsche Bank Securities leading the deal, along with original sole lead Stifel Nicolaus Weisel (or Thomas Weisel Partners, as it was known back then).

A potentially expensive missed call

Brenon Daly

Contact: Brenon Daly

With AT&T’s planned purchase of T-Mobile USA now looking increasingly unlikely to close, we may have to take an eraser to our deal totals for 2011 – a very big eraser. Like most other M&A databases, The 451 M&A KnowledgeBase tallies transactions by their date of announcement rather than close. (However, we do note when the transaction is officially complete in our deal records, where relevant.) And recent regulatory developments in AT&T’s proposed consolidation of T-Mobile, which was announced eight months ago, appear to indicate the $39bn pairing may not get consummated.

If that happens, the total M&A spending for 2011 will decline by a full 17%. The planned purchase, which is the largest telco transaction in a half-decade, is three times the size of the next-largest deal announced so far this year, Google’s $12.5bn proposed purchase of Motorola Mobility.

Another way to look at it: AT&T’s $39bn cash-and-stock purchase of T-Mobile roughly equals the average monthly M&A spending around the globe for two full months so far this year. Without the big telco deal, the total value of all 2011 transactions is likely to come in just slightly below the $226bn we recorded in 2004. If that’s where spending does indeed land this year, it would represent an uptick of about 28% compared to 2010 full-year total of $172bn.

Numara keeps flowing along

Brenon Daly

Contact: Brenon Daly

Throughout its long and winding 20-year history, the name may have changed for Numara Software, but the business is still the same. The IT service desk management vendor was originally known as Blue Ocean Software, a name that got erased during the three years the company was owned by Intuit. After TA Associates sponsored a carve-out of the business in October 2005, the newly independent company came up with the name of Numara, a play on its former moniker that means ‘new ocean’ in Latin.

Regardless of what the Tampa, Florida-based company has been called, it has consistently thrown off a ton of cash. According to our understanding, privately held Numara runs north of $100m in sales and north of 35% EBITDA margins. Just recently, the company began to put some of that cash to work in M&A.

After two years out of the market, Numara recently reached across the Atlantic to pick up an Estonian mobile device management (MDM) startup called Fromdistance. (The deal was a tiny one, lining up very closely with the terms for a similar purchase by Research in Motion earlier this year. We estimate that RIM paid about $6m for German MDM startup ubitexx, which was generating less than $1m in sales.) And Numara may not be done shopping. We understand that the company is currently looking at a handful of other possible acquisitions and could well shore up a deal in the next few months.

HP takes itself out of the market

Brenon Daly1 Comment

Contact: Brenon Daly

Over its two previous fiscal years, Hewlett-Packard has spent more than $20bn on a dozen acquisitions, with five of them costing the tech giant more than $1bn each. Those days are over, according to recently named CEO Meg Whitman. In her first conference call discussing quarterly financial results on Monday, Whitman told investors not to expect any ‘major M&A’ in the current fiscal year, which runs through the end of next October. That means HP will look to ink deals valued mostly at less than $500m, she added later in the call.

That conservative M&A plan comes as HP enters what Whitman described as a ‘reset and rebuilding year.’ Both revenue and earnings are projected to slide in the current fiscal year, but HP didn’t offer specifics on the decline. The company scrapped its revenue forecast altogether, while saying only that it expected to earn ‘at least’ $4 in non-GAAP earnings per share (EPS), compared to $4.88 in non-GAAP EPS in the just-completed fiscal year. With roughly two billion shares outstanding, that indicates HP will likely net at least $1bn less this year than last year. No wonder HP isn’t in the mood to go shopping these days.

What to do with webOS?

Brenon Daly

Contact: Brenon Daly, Chris Hazelton

Investors can only hope that Hewlett-Packard doesn’t announce any ‘bold, transformative steps’ this afternoon like it did the last time it discussed its quarterly financial results. Recall that it was just mid-August when the tech giant unveiled a dramatic overhaul of its business: looking to jettison its $40bn PC division while simultaneously closing the largest acquisition in the software industry in seven years. And, to make matters worse, HP announced those moves in the same breath as it said it would fall short of its earnings projections for the third straight quarter.

Given that the makeover had the dubious distinction of being both overdue and ill-conceived, it’s probably not surprising that it was doomed. (As, it turned out, was the chief architect of those plans, Leo Apotheker.) The company had shed as much as $20bn in market value at one point because of the strategic stumbles, although it is ‘only’ down about half that amount now.

Part of the recent recovery has come from the fact that HP has stabilized, at least in some regards. There was no lingering, interminable Yahoo-style search for a replacement when Apotheker got dumped; instead, the company moved Meg Whitman into the corner office in quick order. Also, rather than see through the sale of its PC business – a divestiture that would have only brought pennies on the dollar, if it could have been done at all – HP reversed course and said it plans to remain in the PC business.

Of course, there’s still uncertainty hanging over one key aspect of its Personal Systems Group: webOS. As we see it, HP has four basic options for the business, which supplies operating systems to tablets and smartphones. It could keep webOS and put real investments behind it, even though, in the short term, those efforts might not produce much return. HP could shop webOS to a device maker, which might benefit from an integrated hardware and software product or, at the least, cut the manufacturer’s reliance on Google’s Android. Alternatively, rather than try to sell webOS as an ongoing entity, HP could slim it down to simply a portfolio of patents and put that on the block. And finally, if it can’t sell webOS in any fashion, it could just follow in the footsteps of Nokia and its Symbian OS, and punt the software into the open source community in hopes of gaining developer support with a wider range of webOS devices.