Category: investment banking

What’s ultimate destination for Ultimate Software?

Brenon Daly

Contact: Brenon Daly

After 20 years in business, Ultimate Software may be looking for a new owner. The human capital management (HCM) vendor is rumored to have retained Lazard to shop the company, market sources have told us. The bank will run a narrow process, likely approaching about a half-dozen possible buyers rather than running a full auction, the sources added.

The decision by Ultimate to test the market comes as deal flow in the HCM sector has hit a record level. In 2010, we tallied some $2.4bn in spending on deals, slightly eclipsing the previous record of $2.1bn in 2007, according to The 451 M&A KnowledgeBase. Valuations across the space have been soaring, and Ultimate is no exception. This time last year, shares of the Weston, Florida-based company were changing hands at about $30 each. Now, they’re at $50 – an all-time high. That gives Ultimate a market value of $1.25bn, roughly 4.6 times projected 2011 sales of $270m.

Much of the gain can be chalked up to the company’s decision a few years ago to switch from selling software licenses to a subscription model. (It’s a move that has proved incredibly lucrative for other old-line software companies, as well. Shares of Concur Technologies, which underwent a similar shift in sales model a few years ago, have quadrupled over the past five years and are now valued at $2.8bn.) Ultimate stopped selling new software licenses in April 2009 and recurring revenue (made up of both subscription and maintenance revenue) is now more than three-quarters of total sales.

Qatalyst strikes again, but bigger

Brenon Daly

Contact: Brenon Daly

When Jason DiLullo joined Qatalyst Partners last April, the boutique firm announced that he would play a major role in expanding the firm into semiconductor deals. Indeed he did. Qatalyst is getting sole credit for advising Atheros Communications on its sale to Qualcomm, the largest chip acquisition in four years. (On the other side, Goldman Sachs and Barclays Capital advised Qualcomm.) With an equity value of $3.6bn, it is Qatalyst’s largest deal – by about $1bn, no less – since it opened its doors in March 2008.

The chip deal brings the total value of the 10 transactions that Qatalyst has worked on to more than $17bn. Of course, the firm is primarily known for its role in helping to consolidate the storage sector, working on the sales of Isilon Systems and 3PAR last year, as well as Data Domain in mid-2009. (All three of those companies were erased from the market at their highest-ever valuation.) Collectively, the equity value of those three storage deals is about $7bn – ‘only’ twice the amount of Qatalyst’s sole chip deal.

The IPO pipeline just got even drier

Brenon Daly

Contact: Brenon Daly

Scratch another company off the list of potential IPO candidates for 2011. Managed security services provider (MSSP) SecureWorks got snapped up by Dell on Tuesday for what we understand was a table-clearing bid. (Subscribers can see our full report on the transaction, including our estimated price for SecureWorks.)

The trade sale comes two years after the MSSP was putting the final touches on its prospectus. That offering, which got derailed when the Credit Crisis knocked the equity markets for a loop, was set to be led by Merrill Lynch and Deutsche Bank. (Merrill Lynch, which got picked up by Bank of America later in 2008, got the print on the sale.) We understand that SecureWorks was getting ready to dust off the prospectus, update the numbers and (finally) get it on file with the SEC later this year.

Instead, Dell moved quickly to secure the deal, which will serve as the foundation for its security offering. We gather that talks only really got going after Thanksgiving, going exclusive almost immediately. And Dell had to pay up for that. Of course, Dell could consider its pickup of SecureWorks a bargain, compared to the last dual-track company it acquired. Recall that Dell paid an eye-popping $1.4bn, or 10 times trailing sales, for EqualLogic back in November 2007. The storage vendor, which had formally put in its prospectus, generated almost exactly the same amount of revenue as SecureWorks.

Big is back (sort of)

Brenon Daly

Contact: Brenon Daly

The number of big-ticket deals in 2010 jumped by one-quarter from the level posted in each of the past two years, an indication that buyers are once again open to a bit more risk. We tallied 40 transactions valued at $1bn or more last year, up from 32 in 2009 and 33 in 2008. One of the reasons for the rise in 2010 – unlike the two previous years – is that the acquirers had to top a pretty bullish tech market to secure their deals. Companies including Isilon Systems, Netezza, ArcSight and 3PAR all got taken off the board last year at their highest-ever valuation.

Also unlike the two previous years, we had a number of ‘serial shoppers’ on the list. Hewlett-Packard inked three 10-digit deals in 2010, while IBM and Intel each closed two of the big transactions as well. And it wasn’t just strategic buyers. The Carlyle Group announced a pair of billion-dollar acquisitions – on back-to-back days, no less. Overall, buyout shops accounted for seven deals last year valued at more than $1bn, up from four in 2008 and five in 2009.

10-digit transactions

Year Number of deals worth $1bn+
2010 40
2009 32
2008 33
2007 79
2006 74
2005 70

Source: The 451 M&A KnowledgeBase

2010: not the year it could have been for tech M&A

Brenon Daly

Contact: Brenon Daly

Looking back on dealmaking in 2010, it strikes us that it wasn’t the year that it could have been. With the recession (officially) behind us and many tech companies’ stock prices and cash hoards hitting record levels, we might have thought M&A last year would rebound to pre-Credit Crisis levels. That wasn’t the case.

In 2010, we tallied some 3,200 transactions – a slight 7% increase over the number of deals in the recession-wracked years of 2008 and 2009. In the far more important measure of tech M&A spending, the $178bn in 2010 represented a substantial 21% jump from 2009 levels. But it’s just half the annual amount we saw from 2005-2008. (In fact, the spending in the second quarter of 2007 alone eclipsed the full-year total for 2010.)

Looking deeper at last year’s activity of some of the key tech corporate buyers, we begin to see a partial reason for the muted overall spending, at least compared to pre-Crisis years. Yes, stalwarts like IBM and Hewlett-Packard continued their shopping sprees in 2010. Collectively, that pair announced 23 transactions worth a total of $11.1bn. But other tech bellwethers weren’t so quick to sign deals last year.

Microsoft announced just two purchases in 2010. Symantec sat out the entire second half of 2010 – a period, we might note, that saw its largest rival, McAfee, get snapped up. Cisco Systems did fewer deals in 2010 than in 2009. Included in the list of 2009 transactions for the networking giant were a pair of $3bn acquisitions (Starent Networks and Tandberg), while the largest deal Cisco announced last year was the $99m pickup of CoreOptics.

And although Dell was in the news often for M&A last year, both on successful and unsuccessful transactions, its overall activity basically kept pace with recent years. However, the company’s landmark purchase of 2010 (the $960m acquisition of Compellent Technologies) only ranks as the third-largest deal Dell has made since it jump-started its M&A program in mid-2007.

Tech bankers see a bit more of everything in 2011

Brenon Daly

Contact: Brenon Daly

As we all know, banking is a cyclical business. And after a painfully sharp downturn in recent years, the business is swinging back. It looks to be swinging even higher in 2011, according to our annual survey of many of the top dealmakers. (See our full report on the results.) We would note, too, that the rebound is expected for both the tech M&A market as well as the tech banking industry itself.

Consider this: Four out of five tech investment bankers said their pipeline appears fuller now than it did a year ago, up from two-thirds of them who said the same thing in our previous year’s survey. If we flip it around, just one out of 20 bankers (7%) said the pipeline is drier than it was a year ago, down from one out of five (20%) who said the same thing in the previous survey. The recovery is even more pronounced when we consider that in our 2008 survey, more than half of the bankers said they had fewer mandates in the pipeline than they did the prior year.

Meanwhile, concerning the tech banking business itself, respondents indicated that their firms expect to be hiring more in the next six months. They also reported that deals were closing more quickly and fee rates on the transactions were actually ticking higher.

And the Golden Tombstone goes to …

Brenon Daly

Contact: Brenon Daly

In addition to asking corporate development executives in our annual survey to look ahead and predict M&A activity and valuations in the coming year, we also asked them to look back and tell us which deal of the previous year they thought was the most significant. The winner for 2010? Intel’s $7.7bn purchase of McAfee, an unexpected transaction that landed the largest stand-alone security company inside the dominant supplier of microprocessors. At nearly twice the value of the previous largest security deal, it’s a risky bet that security will become another integral consideration around silicon, along with power consumption and performance.

The landmark Intel-McAfee pairing barely edged out Hewlett-Packard’s contested acquisition of high-end storage vendor 3PAR in the voting by corporate development executives for the Golden Tombstone for the top deal of the year. Past winners of the highly coveted award include Oracle-Sun Microsystems (2009), HP-EDS (2008) and Citrix-XenSource (2007).

We suspect that the competition for next year’s Golden Tombstone may be even more intense, at least according to one indication in our survey. (See our full report on the survey.) When we asked corporate development executives about how likely they were to do ‘transformative acquisitions,’ more than half (52%) said they planned to do one of these risky, bet-the-company kind of transactions. In our 2009 survey, just one out of five respondents said that.

A less-than-bullish outlook for corporate shopping

Brenon Daly

Contact: Brenon Daly

The results of our annual survey of corporate development executives are in and the outlook for technology M&A in the coming year is less than bullish. Consider this change in sentiment: the number of respondents who thought the overall M&A market would improve in the coming year dropped from half (52%) in the 2009 survey to just one-third (35%) this time. Meanwhile, the percentage that projected the market will be worse tripled from just 7% last year to 23% this year. The fact that roughly one out of four corporate buyers expects the market to deteriorate is a rather bearish sign, we would suggest.

Moreover, that bearishness around the overall market carries over to projections about their own company’s buying plans for 2011. Just half (52%) said they expected to be busier in 2011 than this year. That’s down from two-thirds (68%) who said the same thing last year. (In 2009, 15% of respondents said the acquisition pace at their firms would ‘increase significantly,’ twice the level that said the same thing in this year’s survey.) See our full report on the outlook for M&A activity and valuations in the coming year from corporate development executives.

BMC adds to automation capabilities

Brenon Daly

by Brenon Daly

BMC Software hopes its latest purchase will make life easier for database administrators (DBAs) and systems operations. The management giant on Friday picked up longtime partner GridApp Systems, adding the startup’s database automation offering to its broader automation and management portfolio. GridApp automates tasks such as database provisioning and patching – mundane and time-consuming chores for DBAs, but ones that are critical for security and compliance reasons. Additionally, it enhances BMC’s full-stack automation capabilities.

The importance of this technology was highlighted (in part, at least) by another acquisition earlier this year. In late August, Hewlett-Packard reached for Stratavia, a startup that had begun life as a database management vendor but expanded into application-layer automation as well. (Pacific Crest Securities advised Stratavia, while GrowthPoint Technology Partners banked GridApp.) Even if the technology in the two deals doesn’t line up exactly, we understand that the valuations are nearly identical. Both GridApp and Stratavia, which were small, nonetheless garnered a 10 times multiple.

Laying out a dual track for Conerstone

Brenon Daly

Contact: Brenon Daly

If current IPO candidate Cornerstone OnDemand is looking for a company to model itself on – at least in terms of the offering and after-market trading – it could do a lot worse than SuccessFactors. Both vendors sell human capital management (HCM) software, and both sell it on a subscription basis. Further, both companies were relatively small (sub-$40m in revenue) and running deeply in the red when they put in their paperwork. Not that it has mattered in the case of SuccessFactors. Shares in the company have tripled from the offer price, giving it an eye-popping market valuation of $2.3bn.

Whether Cornerstone will enjoy an equally remarkable run as a public company remains to be seen. (The company, which initially filed in September, would probably be looking at pricing in the first half of next year.) But in a recent report, we wonder if Cornerstone will even make it to the Nasdaq at all. The reason? The M&A market for HCM vendors has been hot lately. Spending on deals in the market so far this year is running at three times the level of both 2008 and 2009. And valuations, for the most part, continue to come in at above-market multiples.

In the report, we speculate on two potential buyers: one that’s obvious (ADP) and one that’s more of a stretch (salesforce.com). Cornerstone has some traits that would clearly appeal to both, as well as some that make a trade sale to either would-be acquirer less likely. ADP, which has already purchased a half-dozen HCM providers, currently has a five-year reselling agreement with Cornerstone, and even holds rights to some warrants in the startup. However, a closer reading of Cornerstone’s prospectus indicates that the early returns from that reselling arrangement haven’t been encouraging, with the two sides feuding over whether or not ADP has hit the agreed-upon sales targets and is, therefore, entitled to warrants that could be worth several million dollars.

Unlike ADP, which has a demonstrated interest in and appetite for HCM deals, salesforce.com is a much more speculative buyer for Cornerstone. But it’s a pairing that is perhaps not as farfetched as it might seem. After all, salesforce.com has long said that it wants to be relevant to all employees at a business, not just to those in sales. Buying Cornerstone would immediately give salesforce.com a high-profile presence in the HCM market, opening up an opportunity that far exceeds its core CRM market. Of course, a major acquisition like this would go against the direction that salesforce.com has taken as an open, all-inclusive platform provider.