Category: investment banking

The two halves of the third quarter

Brenon Daly

Contact: Brenon Daly

It’s rare that a single quarter is divided so cleanly into two completely different – almost irreconcilable – halves. Yet that’s exactly how tech M&A played out in the just-closed third quarter. From the start of July until the middle of August, dealmaking followed the same arc of recovery that it had tracked for most of 2011. And then, seemingly overnight, the stability and confidence vanished, swept away by renewed concerns about the state of the global economy. That left M&A in the back half of the quarter looking a lot like it did in the recession years of 2008 and 2009, rather than earlier this year.

Recent quarterly deal flow

Period Deal volume Deal value
Q3 2011 934 $62bn
Q2 2011 942 $67bn
Q1 2011 914 $86bn
Q4 2010 794 $41bn
Q3 2010 791 $50bn

Source: The 451 M&A KnowledgeBase

Just to put some numbers to the split Q3, consider this: two-thirds of M&A spending came in the first six weeks of the quarter, with the final six weeks accounting for the remaining one-third. (Incidentally, that’s the direct inverse of the typical seasonal pattern for Q3, which almost invariably finishes stronger than it starts.) The number of deals in the second half of Q3 dropped more than 10%. More significantly, however, the transactions that did get done toward the end of the quarter were much more conservative than the deals inked earlier. Of the 20 largest transactions announced in the July-September period, only four came in the back half of Q3. Click here for a full report on the challenging third quarter.

Is Q1 the one for IBM?

Brenon Daly

Contact: Brenon Daly, Andrew Hay

Despite posturing for a public market debut for some time, we understand that Q1 Labs may instead be headed for a trade sale. IBM is reportedly set to acquire the fast-growing ESIM vendor in a deal to be announced this week. The price for Q1, which recorded sales of some $60m over the past four quarters, couldn’t be learned. Goldman Sachs was in line to be lead underwriter for the IPO but instead will get the print, according to our understanding.

Assuming it closes, the deal would come almost exactly a year after ESIM kingpin ArcSight sold to Hewlett-Packard. (In that process, we gather that IBM was a bidder for ArcSight through the late rounds, as was EMC. McAfee was interested as well but was priced out relatively early on.) HP paid roughly 8 times trailing sales for ArcSight. Slapping that same multiple on Q1 values the Waltham, Massachusetts-based company at nearly a half-billion dollars. IBM had paid a similar multiple for Netezza and BigFix and only a slightly lower one in its most recent significant security acquisition, Guardium.

Rumors about a possible sale of Q1 have swirled for a number of years, with suitors ranging from Cisco to Oracle to McAfee. However, the most consistent name attached to Q1 has been its largest OEM partner, Juniper Networks. Indeed, sources indicated earlier this year that Juniper was considering an acquisition but a wide gap emerged over the valuation. Apparently, Juniper was offering about $300m, while Q1 was holding out for a number significantly higher than that.

The September slump

Brenon Daly

Contact: Brenon Daly

It seems September wasn’t just a month to forget for the Boston Red Sox. Tech M&A also had a slump of its own this month. Although the decline in dealmaking wasn’t nearly the historic proportion of the ‘BoSox debacle,’ which saw the team drop 20 of its final 27 games and miss the playoffs, spending on acquisitions in September came in at its lowest monthly tally in 2011.

The aggregate value of all tech deals announced in September totaled just $8.5bn. (And nearly half of that amount came from a single transaction, Broadcom’s $3.9bn all-cash offer for NetLogic Microsystems.) Not only is September the lowest monthly total so far this year, it also represents a decline of one-third from spending in September 2010.

The slowdown in September also reverses the typical seasonal pattern of the third quarter. In recent years, roughly two-thirds of the entire M&A spending in Q3 has taken place in the back half of the quarter. But then, economies around the globe are currently facing more challenges and uncertainties than they have at any point since the Great Recession ended. That could make for a pretty tough finish for M&A in 2011, a year that started out solidly on the road to recovery.

M&A activity, Q3

Period Deal volume Deal value Number of deals valued at $1bn or more
Sept. 2011 279 $8.5bn 1
Aug. 2011 335 $40.2bn 6
July 2011 319 $12.9bn 4

Source: The 451 M&A KnowledgeBase

A renaissance of PE interest in Renaissance

Brenon Daly

Contact: Brenon Daly

In 2010, PLATO Learning went private in a relatively straightforward process that took just two months from Thoma Bravo’s announcement of the leveraged buyout (LBO) of the online education vendor to the close of it. Now, privately held PLATO is drawing out – and making more expensive – the LBO of fellow online education provider Renaissance Learning. PLATO has been part of a bidding war for Renaissance that has been playing out since mid-August.

In the original offer, buyout firm Permira planned to acquire Renaissance, which has been public since 1997, in a deal valued at $440m. (Somewhat unusually, terms call for Permira to pay one price for Renaissance’s common shares that trade on the Nasdaq while paying a lower price to the cofounders of the company, who control 69% of the equity.) PLATO then topped Permira’s opening bid a week later.

Earlier this week, Permira raised its offer, as did PLATO. However, the board continues to support the Permira bid – even though it values Renaissance at $16m less than the offer from PLATO. The reason? The cofounders don’t want to sell to PLATO. Other shareholders, who represent the remaining 31% of Renaissance equity, will have a chance to vote on Permira’s offer on October 17

Certainty for some, uncertainty for others

Contact: Thejeswi Venkatesh

Despite a few high-profile acquisitions recently, some companies have trouble finding buyers. For instance, STX pulled out of contention for Hynix Semiconductor, citing market uncertainties. This was the third time in as many years that the creditors-turned-owners of Hynix, whose revenue mix consists of more than 70% DRAM and about 25% NAND flash, have tried to unburden themselves of their stake. Hynix now has just one suitor, SK Telecom, a dynamic that probably won’t help the company’s sale price.

The fact that STX is walking away isn’t surprising, given the erosion of business at Hynix. In a recent filing, Hynix indicated that its revenue in the recent quarter declined 16% to $2.4bn on a year-over-year basis. The company reported that DRAM sales will further decline due to falling PC sales although Flash, used in all mobile phones, will see a moderate increase. Hynix’s primary competitor, Micron Technology, also saw a decline in sales and is currently trading at less than 1 times sales and a paltry 1.8x trailing EBITDA. Both Micron and Hynix operate at a gross profit in the mid-20% range. (To put things in perspective, Qualcomm runs at an overall profit margin of 30%.)

Of course, these travails are not limited to the tech sector. Cerberus Capital Management and a partner recently withdrew their bid for Innkeepers USA, a hotel chain operator, also blaming market uncertainties. The two sides are currently fighting it out in court over whether the buyout shop and its partner has to hold to its plan, or whether there has been a ‘material adverse change’ that lets the would-be buyers walk away from the deal.

The emergence of convergence

Ben Kolada

Contact: Ben Kolada

The telecommunications and IT industries are increasingly converging, with Verizon Communications’ recent CloudSwitch acquisition perhaps the best example of a telco moving up the IT stack. But the CloudSwitch deal is just one example of a series of moves by telecom service providers to attack the $3bn cloud computing market. Other telcos – such as Interoute Communications with its recent Quantix buy – are merely gobbling up cloud vendors, and may be missing out on the industry’s full potential.

Somewhat IT ignorant, telecom service providers have understandably taken a cautious and hands-off approach to cloud computing. In fact, telcos that have announced the biggest deals so far have allowed their acquired properties to operate mostly autonomously, rather than fully integrate both companies in order to take advantage of their shared strengths.

To educate service providers on how to effectively move toward the cloud, tomorrow at 8am PST we will host a webinar titled ‘Telcos in the Cloud: Who’s Doing What With Whom, and Why?’ Antonio Piraino, vice president of Tier1 Research, will join me in discussing cloud strategies, partnerships and acquisitions that telcos are and should be employing to harness the cloud industry’s growth potential. Click here to register for this free one-hour webinar.

CommVault going it alone

Brenon Daly

Contact: Brenon Daly

Even though many of the storage companies that went public over the past half-decade have subsequently been erased from the market through M&A, don’t look for CommVault to join that list. At least that’s the official word from the top of the company. CEO Robert Hammer said during his presentation at ThinkEquity’s Annual Growth Conference last week that the odds of his company getting acquired are ‘diminimous.’

CommVault is often mentioned as a takeover target, with Dell generally being viewed as the most likely buyer. Dell is CommVault’s largest OEM partner, accounting for a bit more than 20% of the company’s overall revenue. Dell has already purchased a half-dozen storage vendors, including EqualLogic and, most recently, Compellent Technologies. And now that Dell has punted its relationship with EMC, building up its own storage portfolio is a key mandate. (As one of the largest stand-alone backup software providers, CommVault competes primarily with Symantec, but also bumps up against EMC and IBM, among others.)

CEO Hammer says that rather than join the M&A parade, he’s planning to build CommVault into an independent company with sales of $1bn and an operating margin of 25%. That implies CommVault tripling revenue and more than doubling the operating margin. (One of the main reasons why CommVault runs at a relatively low 11% operating margin is because it spends more than half of its revenue on sales and marketing.) Hammer declined to set a timeframe for when the 11-year-old firm would hit those targets.

The ball is rolling in semiconductor networking M&A

Ben Kolada

Contact: Ben Kolada, Thejeswi Venkatesh

In announcing its largest-ever deal, and paying a princely price at the same time, Broadcom is keeping the ball rolling in semiconductor networking M&A. The company’s nearly $4bn pickup of NetLogic Microsystems comes less than two months after rival Intel announced a smaller strategic play of its own, and it likely won’t be the last transaction before the buyout curtain closes.

After a dearth of big-ticket semiconductor networking acquisitions, such vendors are now becoming hot properties. Before announcing its landmark NetLogic purchase, Broadcom itself bought networking provider Teknovus in February 2010 for $123m (in an earnings call, Broadcom mentioned that Teknovus generated revenue in the single digits of millions, which implies a price-to-sales valuation far north of 10x). And in July, Intel announced that it was acquiring Fulcrum Microsystems for a price we hear was in the ballpark of $175m, or about 13x trailing sales.

Broadcom’s richly priced offer for NetLogic, which values the target at 9.2x trailing sales, likely won’t be the last deal in this sector. If you ask The Street, the next companies to get scooped up could be Cavium Networks or EZchip Technologies. Shares of both firms surged following Broadcom’s announcement. As for likely acquirers, we could point to deep-pocketed vendors Qualcomm and Marvell Technology. With $10.7bn and $2.4bn of cash in their coffers, respectively, either company could easily digest Cavium, which currently sports a market cap of roughly $1.7bn.

A deflating bubble

Brenon Daly

Contact: Brenon Daly

If, as some observers suspect, the valuations for tech startups are overinflated, then at least a bit of air is expected to leak out of the bubble. According to our recent survey of corporate development executives, two-thirds of the respondents indicated that they expect valuations for private companies to decline through the rest of the year. The 65% who predicted a slide in the exit prices for startups is more than five times higher than the 12% who projected that valuations would tick higher. (The question about startup valuations was part of a larger survey about M&A expectations for the rest of 2011. See our full report on the survey.)

Interestingly, the mid-2011 outlook is almost exactly the inverse of what corporate development executives told us at the beginning of the year. In our previous survey, 71% forecasted higher M&A valuations for startups this year, compared to just 9% who saw a decline. In fact, the only time the sentiment from our mid-2011 survey even loosely lines up is back in the 2009 survey, which was conducted at the depth of the Great Recession. At that time, nearly nine out of 10 respondents projected that private company M&A valuations in that year would decline, compared to just 5% who predicted an uptick.

Projected change in private company valuations

Period Increase Stay the same Decrease
Mid-2011 for remainder of year 12% 23% 65%
December 2010 for 2011 71% 20% 9%
December 2009 for 2010 58% 36% 6%
December 2008 for 2009 4% 9% 87%
December 2007 for 2008 39% 28% 33%

Source: The 451 Group Tech Corporate Development Outlook Survey

Forget the rebound, many companies see double dip

Brenon Daly

Contact: Brenon Daly

According to many big tech acquirers, the rest of 2011 is shaping up to look an awful lot like 2009. From forecasts for declining valuations to indications of a dramatically more conservative approach to M&A, there was a bearishness in the responses to our special midyear survey of corporate development executives that hasn’t been seen since we were mired in the Great Recession. (See the full report.)

And while the responses to our most recent survey may not have hit the same lows of two years ago, many views began to approach those gloomy levels. In any case, it was a dramatic reversal from the relatively robust forecast given at the beginning of 2011. Taken altogether, the responses to our most recent survey indicate that there’s a growing concern about a recessionary ‘double dip’ that threatens to stall dealmaking for the rest of the year.

Just one-third (32%) of the corporate development executives we surveyed last month indicated that they expected their company to pick up the pace of M&A in the second half of 2011, down half (52%) from those who predicted an acceleration for full-year 2011 in our survey back in December. Meanwhile, the number who projected a slowdown more than doubled to 18% from 7%. Another way to think about it is that nearly one out of five people told us that their company won’t be as busy in the remainder of the year as it was in the first half of 2011.

Projected change in M&A activity

Period Increase Stay the same Decrease
Mid-2011 for remainder of year 32% 50% 18%
December 2010 for 2011 52% 41% 7%
December 2009 for 2010 68% 27% 5%
December 2008 for 2009 44% 33% 23%

Source: The 451 Group Tech Corporate Development Outlook Survey