Category: investment banking

A longshot for Leo?

Brenon Daly

Contact: Brenon Daly

Hewlett-Packard is now, officially, Leo Apotheker’s company. Since his somewhat surprising appointment as HP’s chief executive last fall, Apotheker has been taking small steps while also dropping big hints that he would be recasting the tech giant. But few observers could have imagined the almost unprecedented scope of the transition that Apotheker laid out late Thursday: HP will be integrating the largest acquisition in the software industry in seven years while simultaneously looking into selling off its hardware business.

Wall Street appears to be skeptical that HP can pull that off, as shares in the company on Friday sank to their lowest level since mid-2006. (Incidentally, that’s just before Apotheker’s predecessor, Mark Hurd, took over the company.) On their own, either one of HP’s dramatic moves (working through the top-dollar acquisition of Autonomy Corp and possibly selling the world’s largest PC maker) would be enough to keep any company busy. Taken together, the combination appears doubly difficult. And that’s even more the case for HP, which, to be candid, has a spotty record on M&A.

Consider this: Autonomy will be slotted into HP’s software unit, which has been built primarily via M&A. But that division runs at a paltry 19% operating margin, less than half the rate of many large software companies, including Autonomy itself. And then there’s the $13.9bn HP spent in mid-2008 for EDS in an effort to become a services giant. So far this year, however, that business hasn’t put up any growth. And perhaps most damning is the fact that HP now doesn’t really know what it will do with its hardware business – a unit that largely comes from the multibillion-dollar purchases of Compaq Computer and Palm Inc.

Microsemi opens the hostilities

Brenon Daly

Contact: Brenon Daly

In a bear-hug letter last month, Microsemi warned fellow chipmaker Zarlink Semiconductor that it was ready to ‘take all necessary actions’ to consolidate the Canadian company. On Wednesday, that came to pass: Microsemi said it would bypass Zarlink’s board, which shot down the unsolicited offer, and take its $549m all-cash bid directly to shareholders. Incidentally, the opening of this hostile offer in the semiconductor industry came on the same day that SABMiller launched its $10bn hostile bid for Australian brewer Foster’s Group.

Going hostile in deals is relatively rare, as the drawn-out procedure can be expensive and disruptive to business on both sides. Further, in the tech industry, the conventional wisdom has always been that hostile approaches would cause an exodus of employees at the target company, undermining the very reason for the acquisition. (Given our realpolitik view of the world, we’ve always been a little bit skeptical about that bromide. We just can’t help but think back a few years ago to how PeopleSoft, with its culture of hugs and Hawaiian shirts, stood up to the relentless push by Oracle.)

Whatever the theoretical concerns, Microsemi must have certainly factored them in before launching the offer. The company says it has the financing in place, and will have its bid open through September 22. (Morgan Stanley and Stifel Nicolaus Weisel are advising Microsemi, while Ottawa-based Zarlink is relying on RBC Capital Markets.) It’s hard to know exactly which way Zarlink shareholders will go on this one, but we can’t help but note that shares on the Toronto Stock Exchange have already traded through the bid since Microsemi floated its offer.

A little something for your trouble

Brenon Daly

Contact: Brenon Daly

Breaking up is hard to do. And it can be expensive, too. But as a pair of deals this week shows, the costs aren’t necessarily borne equally by the two sides in a planned transaction. In the higher-profile case, the market is buzzing that Google may be on the hook for a $2.5bn payment to Motorola Mobility if that deal unravels. If that’s the case, the payment (known as a reverse breakup fee) would be 6-7 times larger than the payment Google would stand to pocket if Motorola Mobility walks away from the transaction.

That gap is much wider than is seen in deals that feature reverse breakup fees, where a would-be buyer might face a fee that would be closer to twice the amount the seller might pay. That’s how it is, for instance, in Permira’s planned $440m buyout of education software maker Renaissance Learning. According to terms of Tuesday’s leveraged buyout (LBO), if Permira walks away from the transaction, it will have to come up with $26m, or nearly 6% of the equity value of the proposed deal. On the other side, if Renaissance Learning backs away, it will have to hand over just $13m, or about 3% of the equity value.

Reverse breakup fees have long been an accepted way for a would-be seller to receive compensation for any risks in getting a transaction closed. (The rationale is that the disruption in business due to an acquisition is much greater to the target company than the acquirer, so the greater potential risk is offset by a greater potential reward.) Of course, these fees are far more common in LBOs than when the deal is struck between two companies, like Google buying Motorola Mobility. But then again, the search giant – going back to its Dutch auction IPO and continuing to today’s practice of not giving quarterly financial guidance – has never been a company that really follows Wall Street convention.

Google gets discounted Droids

Brenon Daly

Contact: Brenon Daly

Google didn’t have to reach too deeply to fatten its patent portfolio as it also becomes one of the few vertically integrated smartphone and tablet makers. Sure, it will have to hand over $12.5bn in cash for Motorola Mobility to cover its planned purchase of the hardware manufacturer. But it will immediately get back some $3bn in cash from Motorola Mobility, as well as an undisclosed amount of tax advantages that can be used to lower the amount of taxes that the wildly profitable search giant will face in the future. Even setting aside the very real tax breaks, Google is on the hook for just $9.5bn for Motorola Mobility.

The enterprise value of $9.5bn works out to just 0.75 times the $12.7bn of revenue that Motorola Mobility has generated over the past four quarters. That’s less than half the median valuation (1.8x trailing sales) of all tech transactions announced so far this year, according to our calculations. Further, it’s just one-third the multiple of 2.2x trailing sales that we calculated for the 50 largest deals (by equity value) so far this year.

More relevantly, it’s half a turn less than Hewlett-Packard paid in 2010 to bolster its integrated mobile strategy. Last April, HP paid $1.4bn for Palm Inc in a transaction that valued the struggling company at some 1.1x sales. (And we could certainly make the case that Motorola Mobility is in better financial shape than Palm, which was burning cash amid a dramatic sales slowdown.) Another way to look at it: Google’s bid values Motorola Mobility only slightly above the current market multiple for fellow mobile device vendor Research In Motion. But then, we should add that shares in the Blackberry maker are currently changing hands at their lowest level in a half-decade.

Summing up the IPO calculus

Brenon Daly

Contact: Brenon Daly

At the risk of oversimplifying the market for new offerings this week, we might nonetheless formulate an equation like this: AAA to AA+ = RW. Spelled out, that means: The historic downgrade in the credit worthiness of the US contributed to some of the bloodiest days Wall Street has seen, which in turn contributed to many IPO candidates deciding to scrap their planned offering. (Companies formally do this by filing what’s known as an RW form, for ‘Registration Withdrawal,’ with the SEC.)

Amid the choppy trading this week, both WageWorks and Trustwave shelved their proposed IPOs, which were originally expected to raise, collectively, about $200m for the companies. Instead, they’ll be heading home empty-handed from their aborted push to the public market. (The sole tech firm that made it to market, online backup vendor Carbonite, did so only after trimming its offering, which meant raising one-third less money than planned.)

While WageWorks and Trustwave – both of which have been active acquirers, even as private companies – will undoubtedly miss that windfall from their planned IPOs, the decision to scrap the offerings this week was inevitable. For a bit of context, consider this: When the two companies originally filed their paperwork to go public back in April, the Nasdaq was roughly 10% higher and the overall market volatility (as measured by the CBOE Volatility Index, or VIX) was less than half the level it is now.

Are Internet infrastructure exits interconnected?

Ben Kolada

Contact: Ben Kolada

Providing further proof that it’s a tough time to be on the market, much less come to market, GI Partners has opted to sell its Telx investment rather than battle through an IPO. The company’s sale to ABRY Partners and Berkshire Partners closes the books (at least for now) on a proposed public offering that Telx initially filed back in March 2010. And we wouldn’t be surprised if Telx’s sale caused other IPO candidates in the industry to rethink their entry onto the public stage as well.

Terms weren’t disclosed, but we understand that Telx caught a fairly high valuation that would have provided a more immediate – and lucrative – return than an IPO. Although the Internet infrastructure industry showed resilience throughout the recession, consistently growing revenue, that hasn’t always been the case when it comes to the public markets. Chinese datacenter operator 21Vianet Group, for example, closed its first trading day on the Nasdaq with a market cap of $1bn. However, since then its shares have lost 40% of their value. (We note, however, that the success of 21Vianet’s IPO was due in part to success from other Chinese IPOs, as well as buyout speculation in the industry.)

Just as the Internet infrastructure market focuses on interconnection, we suspect that its participants’ exits are also interconnected. We feel that Telx’s recent sale to ABRY Partners and Berkshire Partners could cause the industry’s other IPO candidates to pause before hitting the public markets. Our colleagues at Tier1 Research maintain a list of the Internet infrastructure industry’s potential IPO candidates. Although speculation surrounds such fast-growing firms as SoftLayer Technologies, Peak 10, Zimory and Next Generation Data, an IPO for these players may be pushed to the back burner, at least for the foreseeable future.

‘Bear-ing’ down on the IPO market

Brenon Daly

Contact: Brenon Daly

This time last week, the Dow Jones Industrial Average was just above 12,000. Even with today’s relief rally, the benchmark index is 1,000 points lower, and is at its lowest level since last October. More broadly, both the S&P 500 and the Nasdaq have dropped 15% over the past month – declines that cut more than $1 trillion of market value from indexes. Amid all of this value being erased from the market, it’s no wonder that companies are struggling to create new market value, in the form of an IPO.

At least three tech vendors are hoping to debut this week, including online backup provider Carbonite, compliance security specialist Trustwave and WageWorks, which provides services around employee benefits. But those offerings by unknown and unproven companies appear to be a tough sell when the shares of well-known firms with a proven track record are getting mauled by the current bear market.

We’re already seeing signs of the fallout from the rout. WageWorks had to substantially trim the price range in its expected IPO last week. And on Monday, Cornerstone OnDemand, which went public in March, shelved a planned secondary offering.

Even if the equity market does stabilize in the coming days, there’s still a fair amount of uncertainty lingering from recent events such as the debt ceiling debate and the downgrade of the US credit rating, a move that would have been almost unimaginable in earlier decades. Reflecting that skittishness, the CBOE Volatility Index, or VIX, closed at 48 on Monday. That’s the highest reading since the recession days of early 2009 and twice the level from earlier this summer. Altogether, it’s a tough time to be on the market, much less come to market.

In Network Solutions’ sale, General Atlantic gets a bit of both exits

Ben Kolada

Contact: Ben Kolada

Web.com is acquiring Web hosting and domain name registration vendor Network Solutions in a deal valued at $756m, including the assumption of debt. And we expect that Network Solutions’ owner couldn’t be more relieved. With flat revenue and customer attrition in recent years, Network Solutions’ private equity owner, General Atlantic (GA), wasn’t likely to find much interest for the portfolio company on Wall Street.

However, GA structured the transaction in such a way that – at least for now – it is enjoying a good day on the stock market. Terms of the deal call for just over a quarter of Network Solutions’ price to be covered by Web.com shares. (That will leave GA and other Network Solutions’ shareholders owning 37% of the combined company.) Web.com initially valued that chunk of equity at about $150m. On Thursday afternoon, the value of the 18 million Web.com shares heading to GA and other owners had soared closer to $200m. The reason? Wall Street liked the acquisition as well as Web.com’s second-quarter financial results. (We’ll have a full report on this transaction in tonight’s Daily 451 and 451 TechDealmaker sendouts.)

Saying ‘Goodnight’ to a stand-alone SAS?

Brenon Daly

Contact: Brenon Daly

After years of politely – but unequivocally – rebuffing all M&A approaches, is SAS Institute chief executive James Goodnight suddenly listening to pitches? Rumor has it that Goodnight, who has fashioned the business analytics vendor in the manner of a corporate patriarch of the 19th century, may finally be ready to sell. Any deal for SAS, of course, would have to go through Goodnight, as he owns two-thirds of the company outright.

If SAS is indeed in play – which, granted, is a big, multibillion-dollar assumption – it would represent a dramatic shift in not only the corporate history of the 35-year-old company, but also, more broadly, the landscape for business intelligence (BI) software. Goodnight has steered his firm on a path of independence through the years of consolidation in the BI industry. Most notably, he sat out the spree of deals in 2007 that saw his three largest publicly traded BI rivals get snapped up for a total of some $15bn.

All the while, Goodnight has been shaping a culture at SAS that is a bit of a throwback to the cradle-to-grave employee benefits that other tech vendors, which have to appease outside investors, could never offer. (Among the perks: a pianist who plays in the employee cafeteria, Olympic-sized swimming pools and even onsite Montessori childcare.) SAS employs more than 12,000 people.

SAS’s unique corporate traits have made it not only one of the most valuable privately held software companies, but also one of the most difficult to know what to do with it. (We have referred to SAS as the ‘white elephant’ of the software industry.) A decade ago, SAS worked with Goldman Sachs to explore a possible IPO, but that came to nothing. Goldman is thought to be running the current M&A process for SAS, too.

So that leaves a sale of SAS as Goodnight’s only exit. Companies rumored to be interested in SAS include Hewlett-Packard, IBM, Oracle, SAP and EMC, which is thought to be the lead horse at this point. But there’s still the not-insignificant matter of price. While still loose, the numbers we have heard for SAS, which recorded sales of $2.4bn in 2010, value the company at $12-13bn. Even a price only slightly above that range would make a purchase of SAS the largest-ever software deal, eclipsing Symantec’s $13.5bn stock swap for Veritas Software in late 2004.

Windstream misses the message

Ben Kolada

Contact: Ben Kolada

As the telecom industry continues its buying spree, some firms are missing the bigger picture – hosting and datacenter services are the new growth channels for telcos. While CenturyLink and Verizon have each announced acquisitions in the growing datacenter services industry, Windstream Communications appears to be satisfied with consolidating telecom assets. The telco’s purchase of complementary competitive carrier PAETEC is its seventh telco rollup since its formation in 2006. And while PAETEC does provide a wealth of network assets, it contributes little in the way of revenue growth. For the price it’s paying for PAETEC, Windstream could have gobbled up a number of hosting properties at a fraction of the cost.

To be fair, Windstream’s PAETEC pickup does provide more than 50,000 high-revenue enterprise accounts and an expanded fiber footprint. But the target’s organic revenue has been flat in recent years, and growth this year is likely to come primarily as a result of the Cavalier Telephone buy it completed in late 2010. (We would also note that Cavalier’s revenue was in precipitous decline, due primarily to churn in its consumer division. Cavalier’s revenue dropped from $421m for full-year 2009 to an estimated $390m in trailing revenue at the time of its sale.)

Beyond fiber and enterprise accounts, Windstream is also interested in PAETEC’s datacenter services assets. And rightfully so, considering Windstream’s hosting assets could certainly use a boost. The company’s last pure M&A foray into the hosting sector was in November 2010, when it shelled out $310m for Hosted Solutions. That target only generated $51m in trailing sales, or about 1% of Windstream’s total revenue. But for the $2.2bn the telco is paying for PAETEC (including the assumption of debt), it could have easily expanded its hosting footprint in the US and abroad by acquiring both InterNap Network Services and Interxion. Applying a flat 20% equity premium to the pair would put their combined deal value at about $1.6bn on an enterprise value basis, or about three-quarters of PAETEC’s price.