Category: investment banking

Big deals for single PE firms

Brenon Daly

Contact: Brenon Daly

In 2010, it was The Carlyle Group. So far in 2011, it’s Providence Equity Partners. These two private equity (PE) firms have the two largest non-club tech leveraged buyouts in each of the past two years. Recall that last October – on successive days, no less – Carlyle erased both CommScope and Syniverse Technologies from the public market in a pair of deals that cost the buyout shop $6.5bn. (Understandably, Carlyle has been fairly quiet since then, announcing only a pair of small transactions.)

Now, Providence has its own double-barrel deals that are on top of the standings. Somewhat unusually, both of the firm’s acquisitions came on the first day of a new quarter: On April 1, it announced the planned take-private of SRA International for $1.9bn, and then followed that up Friday with the $1.6bn buyout of Blackboard to start the third quarter.

PE activity since the Great Recession

Period Deal volume Deal value
Q3-Q4, 2009 62 $12.1bn
Q1-Q2, 2010 57 $10.7bn
Q3-Q4, 2010 76 $15.6bn
Q1-Q2, 2011 78 $11.9bn

Source: The 451 M&A KnowledgeBase

The June swoon, cont.

Brenon Daly

Contact: Brenon Daly

When we looked closer at the dramatic falloff in M&A last month – what we have called the ‘June swoon’ – we saw that the decline not only cut spending by nearly two-thirds, it also slashed the number of richly priced deals. For the 50 largest and most significant transactions of the just-completed second quarter, which we believe have an outsized impact on setting the tone in the overall M&A market, we calculated the median price-to-trailing-sales multiple at 2.25. (Incidentally, that was up slightly from 2.15 in the first quarter.)

For the first two months of Q2, there was a steady flow of significant deals valued at least twice as rich as the ‘market’ multiple of 2.25. Those transactions included Microsoft paying 10 times trailing sales for Skype, LoopNet’s sale to CoStar Group for $860m (9.5x trailing sales), Symantec’s move to bolster its e-discovery offering with its $410m purchase of Clearwell Systems (7x trailing sales), and EMC’s reach for NetWitness, which we estimate valued the network forensic player at almost 6x trailing sales.

But by June, the relatively high-multiple deals were getting harder to find. In fact, last month saw the fewest number of above-median-valuation transactions in the second quarter with just 11 deals, compared to 16 in May and 23 in April. That recent weakness doesn’t particularly bode well for the rest of the year.

Significant transactions* in 2011

Period Median price-to-trailing-sales valuation
Q2 2011 2.25
Q1 2011 2.15

Source: The 451 M&A KnowledgeBase *The 50 largest transactions, by equity value, including publicly disclosed financial terms as well as our own official estimates

A swoon in June for tech M&A

Brenon Daly

Contact: Brenon Daly

For the first two months of the second quarter, tech M&A spending flowed along at basically twice the monthly rate it had been reaching since last summer. The activity spanned virtually all sectors of technology, with chipmakers, storage vendors and telecom giants confidently and consistently throwing billions of dollars at deals in an effort to secure new growth. (Even a reluctant shopper like Microsoft got into the act.) It was like dealmakers had finally – and indelibly – moved past the Great Recession.

Then came the June swoon. Spending on tech deals in the final month of the quarter plummeted nearly two-thirds from the totals for both April and May. The value of transactions announced in June is running at just $9.6bn, the lowest level since February 2010. Of the 10 largest transactions announced in the past three months, only one came in June.

The dramatic decline in June derailed the recovery in the M&A market, leaving the spending totals in the just-completed second quarter below both the year-ago quarter and the first quarter of 2011. We’ll have a full report on second-quarter M&A activity – and what we expect for the remainder of the year – in tonight’s Daily 451 and 451 TechDealmaker sendouts.

2011 activity, month by month

Period Deal volume Deal value
June 2011 297 $9.6bn
May 2011 316 $26.5bn
April 2011 287 $26.5bn
March 2011 300 $63.7bn
February 2011 285 $10.3bn
January 2011 323 $11.7bn

Source: The 451 M&A KnowledgeBase

What happened to the storage sector’s Class of 2007?

Brenon Daly

Contact: Brenon Daly

Back in mid-2007, BlueArc was one of a quartet of storage vendors that put in their paperwork to go public during those go-go days on the stock market. However, if the NAS systems specialist, which recently re-filed its prospectus, does manage to see through its offering on this go-round, it will find itself very much alone. All three of BlueArc’s would-be fellow public storage contemporaries have been consumed by larger tech companies. The total bill for those three transactions: $4.8bn.

Dell would have had a hat trick for the Class of 2007 storage firms, if not for Hewlett-Packard. As it was, the Round Rock, Texas-based vendor took home EqualLogic in November 2007 before that company could even go public and then erased Compellent Technologies from the NYSE last December. Of course, Dell was lead bidder for 3PAR last summer, too, before losing out to HP. (And those deals are just for the big storage providers that filed their S1s in 2007. If we move back a year to 2006, another two vendors – Double-Take Software and Isilon Systems – that debuted that year were both gobbled up in 2010.)

With all this consolidation, where does that leave BlueArc? As we penciled out in our report on its planned IPO, the company is almost certain to be worth less when it does hit the market than it would have been worth before the Great Recession. Somewhat perversely, that’s true even though BlueArc will be twice the size that it was when it put in its prospectus in 2007.

If the company finds that prospect too demoralizing, it could always follow its fellow filers and opt for a trade sale. We would have put forward Oracle as a possible buyer of BlueArc, in a kind of ‘discount’ play for NetApp. But that seems even less likely since Oracle rolled in Pillar Data Systems on Wednesday morning. So, it looks like either HDS decides that it wants to own its OEM partner outright or BlueArc (finally) hits the market.

Bolting onto the PE platform

Brenon Daly

Contact: Brenon Daly

One of the knock-on effects of private equity (PE) spending hitting its highest level in three years in 2010 has been the emergence of bolt-on deals in 2011. Consider the recent M&A activity at Emailvision, an SMB-focused email marketing vendor. The company had been listed on the Euronext, although, candidly, European investors didn’t really appreciate Emailvision’s SaaS delivery model. So rather than stick around as an unloved public company, the firm sold a nearly 70% stake last summer to PE shop Francisco Partners. The transaction valued the overall company at around $109m.

Fast-forward less than a year since selling a majority stake, and Emailvision has already done one small deal as well as a more recent acquisition that it could have never pulled off without the deep pockets of its PE patron. Earlier this month, Emailvision closed its $40m pickup of smartFOCUS, which had been listed on the London Stock Exchange. The transaction added more than $20m to Emailvision’s revenue, which we understand should hit about $110m this year. (That would be nearly twice the level it was before it went private, with M&A boosting an already healthy 40% organic growth rate.) And the vendor may not be done buying. We gather that Emailvision may well announce another deal before the end of the year.

Maybe M&A for McAfee?

Brenon Daly

Contact: Brenon Daly, Andrew Hay

With the ink barely dry on the M&A papers of SolarWinds’ purchase of TriGeo, we understand that another deal in the enterprise security information management (ESIM) market may be already in the works. Several industry sources have indicated that McAfee and NitroSecurity are thought to be close to an agreement that would give Intel’s subsidiary a solid ESIM offering.

McAfee has been looking in this market for some time. We gather that the company lobbed a bid (thought be in the neighborhood of $600m) for ESIM kingpin ArcSight before that company went public in February 2008. More recently, we weren’t surprised to hear that McAfee was in the process early for ArcSight last summer but got outbid by Hewlett-Packard, which ended up paying $1.65bn, or a steep 8 times trailing revenue for ArcSight.

If the acquisition indeed comes together, NitroSecurity would make a great deal of sense for McAfee. NitroSecurity, which we understand is running at about $40m in revenue, sells big-ticket installations to enterprises and the federal government – a market that McAfee clearly wants to be in. (NitroSecurity is also one of the few security vendors that has been able to crack into the industrial control system market, which gives the company a shot at lucrative contracts securing some of the nation’s critical infrastructure.)

The only other ESIM provider of size that might also give McAfee a comparable presence in the enterprise market would be Q1 Labs. However, that firm has a deep relationship with Juniper Networks, which is its single largest OEM partner. Nonetheless, Q1 has ascribed itself a fairly rich valuation, according to sources. The market may well soon have its vote on that, as Q1 recently indicated that it is looking toward an IPO.

Different exits at different prices

Brenon Daly

Contact: Brenon Daly

Imperva’s pending IPO offers a fairly intriguing counterpoint to the trade sale of rival Guardium nearly two years ago. In 2009, both companies would have been rather similarly sized (basically, $35-40m) and posting roughly comparable growth rates.

Rather than continue as a stand-alone vendor, however, Guardium took a relatively rich bid from IBM for what we understand was about $232m, or about 6 times trailing sales. For a deal that was announced in November 2009, when the overall market was only starting to recover from the credit crisis, Guardium’s valuation looked positively platinum. (It was even more shiny when we consider that the Boston-based company raised just $21m in venture backing.)

But now with Imperva’s IPO, we may well get to see what Guardium might have been worth if it had opted for the other exit. (Obviously, there are a lot of flaws built into standing Imperva as a proxy for Guardium, and doing so glosses over the impact of time and risk on the return. But, arguably, it’s still a useful exercise.)

Nonetheless, assuming that Imperva can garner roughly the same trailing valuation that Guardium got in its sale, that would imply an initial valuation of about $330m – or roughly $100m more than its rival’s clearing price. That $330m would work out to about 4.5x this year’s expected revenue, which seems like a reasonable starting point for Imperva when it does hit the NYSE. (See our speciual report on Imperva’s offering.)

Taleo targets Europe, acquires Jobpartners

Ben Kolada

Contact: Ben Kolada

In its first acquisition outside North America, Dublin, California-based Taleo announced today that it is buying European HCM vendor Jobpartners for €26m ($38m). While the price is a fraction of the $145m in cash that Taleo held at the end of March, it’s a fairly rich value for what we understand was a struggling company. We expect that Jobpartners’ wide European reach was the primary influencer for the company’s valuation, particularly since Taleo’s competitors are also looking to expand internationally.

Taleo is paying €26m in cash for Jobpartners and expects to close the deal in its third quarter. That price should be considered plentiful since we understand that the target was burning through cash (at least €36m in VC equity financing, by our tally) and that its revenue was likely in decline. Taleo hasn’t provided full-year revenue for Jobpartners, but expects the target to generate $2-3m in GAAP revenue from the date the deal closes to the end of the year. Annualizing that number would put Jobpartners’ full-year 2011 revenue at about $8-10m, or roughly €5-6m based on current conversion rates. That’s a nearly 50% decline from 2005, when the company issued a press release saying that its fiscal-year revenue hit €8m. We’ll have a longer report on this transaction in tomorrow’s Daily 451.

What would Palm be worth today?

Brenon Daly

by Brenon Daly

We have to hand it to Palm Inc – the smartphone maker got out while the getting was (relatively) good. At least that’s one way to think about Palm’s decision to sell to Hewlett-Packard in April 2010 for $1.2bn. Hitting that bid looks even smarter in light of the beating that Research In Motion has taken since then, including Friday’s capitulation by many longtime shareholders. Consider this: since Palm became an HP business, RIM on its own has lost 80% of its market value. (Meanwhile, the Nasdaq is up slightly during that period.)

While some of RIM’s staggering decline can be traced back to the company’s own missteps around product delays, its fortunes also stand as a sort of proxy for the ‘non-hot’ (i.e., not Apple iOS- or Google Android-based) mobile market. And in that way, we shudder to think how Palm would have fared there if it remained a stand-alone smartphone vendor.

After all, Palm was barely holding on with a single-digit market share, not to mention the fact that it was teetering financially at the time of its sale. The unprofitable company was burning cash and, in the quarter the deal was going through, had just forecast that sales would fall off a cliff. In contrast, RIM is still profitable and growing. But you wouldn’t know that from the relative valuations of the firms. In its sale, Palm was able to fetch a not insignificantly higher valuation than RIM currently garners on the market.

A little leads to a lot as Citi buys Ness

Brenon Daly

Contact: Brenon Daly

More than three years after buying a small stake in Ness Technologies from a fellow buyout shop, Citi Venture Capital International (CVCI) has offered some $307m in cash for all of the IT services vendor. The private equity arm of Citigroup initially picked up a 9.6% stake in Ness in early 2008 from Warburg Pincus, which funded the Israeli firm in 1999. Ness put some of that money to work in M&A, acquiring a dozen (mostly small) companies over the past decade.

Ness had been out of the market for the past year, however, as it was put in play by an unsolicited bid. (Jefferies & Company advised Ness on the sales process, along with the company’s longtime adviser Bank of America Merrill Lynch. Merrill was co-underwriter on Ness’ 2004 IPO.) We understand that Ness had attracted a fair amount of interest over two rounds of bidding, including a look from Vector Capital. CVCI’s offer of $7.75 per share represents the highest price for Ness stock since October 2008. (Interestingly, terms include a ‘no shop’ provision and a breakup fee of $8.35m, or a standard 2.7% of deal value.) CVCI expects to close the transaction within a half-year.