Category: investment banking

A clear return and ‘cloudy’ outlook for Tripwire’s only deal

Brenon Daly

Contact: Brenon Daly

Exactly a year ago, Tripwire made its first and only acquisition in its 14-year history, picking up the assets of Activeworx. The tiny startup added log management technology to Tripwire, an IT configuration and compliance vendor. The deal itself, which only set Tripwire back about $3m, was a fittingly quiet purchase of a company that had lived a pretty quiet life. On Thursday, Tripwire took that technology to the cloud.

Although Tripwire actually closed its pickup of Activeworx last August, it only began talking about its log management offering, which is based on the acquisition, earlier this year. It also only began selling its log management offering earlier this year. As it was rolling out the offering, we noted that the log management market looked awfully crowded. But so far, Tripwire appears to be getting a solid return on its Activeworx buy. From a standing start, Tripwire’s Log Center business has generated about $2m of license sales in the first two quarters of 2010. (And to be clear, that’s GAAP revenue, as listed in the company’s latest amendment to its S-1 filed with the SEC, not some loosey-goosey figure that has been rounded way up.)

Granted, the Log Center contribution is still a small slice of the $18m in total licenses it has sold over the same period, and an even smaller portion of the $40m it tallied as total first-half 2010 revenue. But for a new product introduction, that’s a strong start out of the gate. And today, Tripwire announced a partnership with Terremark through which the datacenter provider will now be offering Log Center to its clients. The on-demand compliance and security arrangement between the two companies marks the first cloud offering from Tripwire.

Having its inaugural acquisition already producing revenue at a strong clip, we suspect that Tripwire will look to return to the market. The only question in our mind is what corporate structure Tripwire will have when it goes shopping again. Will it remain a privately held company, or will it see through its IPO filing and join the ranks of the Nasdaq-listed companies? Or will it – as we have speculated in the past – get snapped up by a larger vendor? From what we’re hearing now, however, a Tripwire trade sale is looking less likely than earlier in the summer. From our perspective, two of the companies that would head any list of likely buyers for Tripwire (McAfee and Hewlett-Packard) have their own M&A events to sort through right now.

Why wouldn’t HP jump the McAfee bid instead?

Brenon Daly

Contact: Brenon Daly

If we had to guess about Hewlett-Packard making an uncharacteristic move and jumping an announced transaction, we would have thought the company would go after McAfee rather than 3PAR. After all, HP has a giant hole in its security portfolio (we might describe it as a ‘McAfee-sized’ hole), while it’s already pretty well covered on the storage side, even if much of its offering is a bit long in the tooth.

Yet that isn’t the way it’s playing out. The recently decapitated company offered $1.7bn earlier this week for 3PAR, adding roughly $410m, or 33%, to the proposed price of the high-end storage vendor. Meanwhile, McAfee’s planned $7.8bn sale to Intel, announced last week, continues to track to a close before the end of the year. (We would note that McAfee is being valued at 3.4 times trailing sales, exactly half the level of 3PAR following HP’s bumped bid, which took the valuation to 7.6x trailing sales.)

HP’s topping bid for 3PAR appears to be a fairly defensive move. For starters, there’s the matter that 3PAR would overlap more than a little bit with its existing core storage offering called StorageWorks Enterprise Virtual Array. Betting on an acquired property to replace – or at the very least, refresh – the heart of a company’s current offering is a risky proposal. On top of that, 3PAR would require a new architecture, rather than just running on top of HP’s existing hardware like its other software-based storage acquisitions (PolyServe, IBRIX and Lefthand Networks).

All in all, looking to derail Dell’s offer for 3PAR appears to be at odds with much of HP’s previous strategy and rationale around storage. And while it pursues that deal (cost what it may), HP passes on McAfee, a one-of-a-kind security asset that would instantly make it much more competitive with IBM, EMC and Cisco Systems. If HP has sincere aspirations about outfitting the next generation of datacenters, we might suggest that it needs to actually own its intellectual property (IP) for security.

So far, however, HP has been content with just OEM arrangements to cover itself for security. (Notably, it has extracted a fairly one-sided agreement with Symantec for consumer anti-malware protection.) And even though buying McAfee would mean an unraveling of a number of those arrangements, we would note that reality isn’t preventing HP from making its bid for 3PAR. Remember that HP currently has an OEM arrangement with Hitachi Data Systems for a high-end offering like 3PAR. Yet it’s prepared to pay – and pay a lot of money – to own the IP itself. Couldn’t the same rationale be used for McAfee?

Arms race M&A in application security

Brenon Daly

Contact: Brenon Daly

If IBM and Hewlett-Packard basically matched each other’s deal size in the first round of M&A for application security, HP has gone much bigger than Big Blue in the second round. In fact, we gather that the price tag for HP’s recent purchase of Fortify Software is more than 10 times larger than the amount IBM paid last summer for rival static code analysis vendor Ounce Labs. (When IBM announced the deal, we speculated that HP may well work out its own tit-for-tat deal, reaching for its partner Fortify.)

Terms weren’t revealed on either the Fortify or Ounce Lab transactions. However, we gather that IBM picked up Ounce Labs for about $25m and that HP likely paid about $275m (including an earnout) for Fortify. Our understanding is that Ounce Labs garnered roughly 3 times trailing sales, while Fortify went for about 4.6x trailing sales of about $60m.

Those deals, which were separated by roughly a year, came after both tech giants had made acquisitions of dynamic code analysis vendors within two weeks of one another. Back in mid-2007, IBM purchased Watchfire for an estimated $140m, roughly matching HP’s $135m acquisition of SPI Dynamics. Both transactions were done at more than 5x trailing sales, according to our understanding. For those keeping track of the arms race M&A by these two tech superpowers, the collective bill for their application security purchases now exceeds a half-billion dollars.

Select application security acquisitions

Date announced Acquirer Target Deal value Target trailing revenue
August 17, 2010 HP Fortify Software $275m* $60m*
July 28, 2009 IBM Ounce labs $25m* $8m*
June 19, 2007 HP SPI Dynamics $135m* $20m*
June 6, 2007 IBM Watchfire $140m* $30m*

Source: The 451 M&A KnowledgeBase *451 Group estimate

There’s only one 3PAR

Brenon Daly

Contact: Brenon Daly

Let’s see, where have we heard this before? A storage company with hundreds of millions of dollars in revenue finds itself in a billion-dollar bidding war between two tech giants, advised in the process by high-end boutique Qatalyst Partners. Last summer, scarcity value drove the price of Data Domain; today it’s 3PAR.

Looking to trump Dell’s existing agreement for 3PAR, Hewlett-Packard on Monday lobbed a topping bid for the high-end storage provider. HP, advised by JP Morgan Securities, is offering $24 for each share of 3PAR, giving the proposed transaction an enterprise value of $1.56bn. (That’s according to our math, compared to the $1.66bn that HP gives its bid.) In any case, the offer is some $380m, or 33%, richer than Dell’s initial bid. Recall that Dell’s offer of $18 valued 3PAR at the highest level ever for the stock.

One interesting observation about HP’s topping bid: it is exactly the same percentage (33%) that EMC had to hand over for Data Domain, which had agreed to sale to NetApp. Of course, this is HP’s first counter, while EMC had to bump its own bid. (Initially it offered $30 for each Data Domain share, but ultimately paid $33 per share when it closed the deal in July 2009.) Of course, there was little hope of NetApp matching EMC in a bidding war for Data Domain. In the case of 3PAR, however, rivals Dell and HP are on much closer financial footing. Terms of Dell’s original agreement with 3PAR call for a $53.5m breakup fee

‘You bought what? For how much?’

Brenon Daly

Contact: Brenon Daly

In both of the largest enterprise IT acquisitions so far this year, the deals are not what they seem. Or more accurately, the target companies were not acquired for what they are. What do we mean? Well, we would posit that Intel didn’t buy McAfee for its core security applications any more than SAP scooped up Sybase for its core database product. Instead, in each case, the buyers really only wanted a small part of the business but found themselves nonetheless writing multibillion-dollar checks for a whole company.

For SAP, the apps giant really wanted Sybase’s mobile technology, essentially using the Sybase Unwired Platform to ‘mobilize’ all of its offerings. It’s nice that the purchase also brought along some data-management capabilities, particularly some pretty slick in-memory database technology. But for SAP, this deal was all about getting its apps onto mobile devices. However, Sybase’s mobile business only generated about one-third of total revenue at the company. So SAP ends up handing over $5.8bn in cash for a business that’s currently running at just $400m.

If anything, Intel is paying even more for the business that it truly wanted – or, at least, the business that’s most relevant – at McAfee: embedded security. Yet that’s only a small (undisclosed) portion of the roughly $2bn revenue at McAfee, the largest stand-alone security vendor. Tellingly, Intel plans to operate as a kind of holding company, letting McAfee continue undisturbed with its business of selling security applications to businesses and consumers.

Intel ‘inside’ of largest security acquisition

Brenon Daly

Contact: Brenon Daly

The largest stand-alone security company is no longer standing on its own. McAfee agreed Thursday to a $7.7bn all-cash offer from Intel. The bid of $48 for each share represents a 60% premium over the security vendor’s previous closing price – and the highest price for its shares since early 1999. Intel’s purchase represents a significant gamble that security can be hardened by pairing software with hardware, which will likely be even more important as the need for security expands from just computers to consumer electronics, datacenter equipment and other devices. Despite that rationale, Intel still struck most observers as a surprise buyer for McAfee, which had been linked in earlier rumors to Hewlett-Packard.

The deal stands as the largest security acquisition ever, nearly twice the size of the number two deal, Juniper Networks’ $4bn purchase of NetScreen Technologies in early 2004. (Juniper used equity to cover that transaction; its stock is currently at the same price it was when it announced that deal.) Interestingly, the banks on both of these mammoth security transactions were the same: Goldman Sachs had both sole buy-side mandates (for Juniper and, more recently, Intel) while Morgan Stanley worked the sell side (sole advisor for McAfee and co-advisor, along with JP Morgan Securities, on NetScreen).

Recent significant security transactions

Date announced Acquirer Target Equity value
August 19, 2010 Intel McAfee $7.7bn
February 9, 2004 Juniper Networks NetScreen Technologies $4bn
June 29, 2006 EMC RSA Security $2.1bn
August 23, 2006 IBM Internet Security Systems $1.3bn

Source: The 451 M&A KnowledgeBase

PE firm Marlin buys BIOS provider Phoenix Technologies

Brenon Daly

Contact: John Abbott

Perhaps it was inevitable. Following the firing of CEO Woody Hobbs earlier this year and the subsequent divestment of three noncore businesses, BIOS maker Phoenix Technologies has itself been acquired. Los Angeles-based private equity firm Marlin Equity Partners offered $3.85 per share, giving the proposed deal an equity value of $139m. (Phoenix held $40m of cash, giving the transaction an enterprise value of $99m). The bid represents a 27% premium over Tuesday’s closing price.

Despite its recent troubles, and the seemingly cyclical nature of its business that has resulted in regular boom and bust periods, Phoenix remains by far the independent market leader in the core systems software marketplace, in particular BIOS software, as required by all Wintel PCs. BIOS remains a vital point of control for OS and desktop management. But under pressure from Intel and open source alternatives, the company has tried on numerous occasions – without any noticeable success – to diversify. That has usually resulted in Phoenix taking its eye off the ball of its core business, which entails maintaining relationships with the big PC vendors as well as the white-box original design manufacturers (ODMs) from Taiwan.

Revenue in the third quarter declined 16% year over year to $13.7m, but Phoenix scraped together a small operating profit, its first since 2008. Ninety staff were cut during the quarter, taking the firm’s total down to 313. Future growth depends on the take-up from OEMs and ODMs of its latest product, SecureCore Tiano 2.0, which began shipping in late March. Phoenix claims 50 wins so far and is working on a further 80 projects for this design cycle. The first systems using the new version should reach the market in fiscal 2011.

Dell’s not-so-identical twin storage deals

Brenon Daly

Contact: Brenon Daly

From an investment banking perspective, both EqualLogic and 3PAR started out and finished their lives in much the same way. The two storage vendors filed to go public within a week of one another back in August 2007, and – pending the close of 3PAR’s sale – both will end up inside Dell. Yet while the final destination is the same, the two vendors’ not-so-parallel tracks to Round Rock, Texas, underscore the fact that the tech M&A market, as well as the capital markets, still have a long way to go to recover from the Credit Crisis.

Consider this: In the sale announced Monday, 3PAR garnered just half the multiple that fellow storage vendor EqualLogic got in its sale to the same buyer, at least based on one key metric. 3PAR sold for 5.6 times trailing sales, while EqualLogic went for 12x trailing sales. We would chalk up the eye-popping premium for EqualLogic mostly to the fact that Dell had to effectively outbid the public market to prevent the company from going public. More to the point, Dell had to outbid a bull market, as the Nasdaq had tacked on 20% in the year leading up to its purchase of EqualLogic in November 2007.

As any company – including 3PAR and Dell – can attest, the bull market ended abruptly and painfully just days after the EqualLogic trade sale. So now we’re left with a market where Dell can offer the highest-ever price for 3PAR shares (representing a staggering 87% premium) and still get a ‘half-off discount’ on valuation compared to its earlier billion-dollar storage deal. But then Dell knows all about discounts over that time period. The company’s market cap has been cut in half (to $25bn from $50bn) from the day it announced its EqualLogic acquisition to Monday’s announcement of the 3PAR purchase.

RainStor, the structured data retention and compression startup that recently renamed itself from Clearpace, has raised $7.5m in series B funding. The round brought in two new investors – Storm Ventures and data integration software specialist Informatica (which licenses RainStor’s technology as part of its Applimation data archive suit <!– /* Font Definitions */ @font-face {font-family:”Cambria Math”; panose-1:2 4 5 3 5 4 6 3 2 4; mso-font-charset:0; mso-generic-font-family:roman; mso-font-pitch:variable; mso-font-signature:-1610611985 1107304683 0 0 159 0;} @font-face {font-family:Calibri; panose-1:2 15 5 2 2 2 4 3 2 4; mso-font-charset:0; mso-generic-font-family:swiss; mso-font-pitch:variable; mso-font-signature:-1610611985 1073750139 0 0 159 0;} @font-face {font-family:Verdana; panose-1:2 11 6 4 3 5 4 4 2 4; mso-font-charset:0; mso-generic-font-family:swiss; mso-font-pitch:variable; mso-font-signature:536871559 0 0 0 415 0;} /* Style Definitions */ p.MsoNormal, li.MsoNormal, div.MsoNormal {mso-style-unhide:no; mso-style-qformat:yes; mso-style-parent:””; margin:0in; margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:12.0pt; font-family:”Times New Roman”,”serif”; mso-fareast-font-family:Calibri; mso-fareast-theme-font:minor-latin;} a:link, span.MsoHyperlink {mso-style-noshow:yes; mso-style-priority:99; color:blue; mso-text-animation:none; text-decoration:none; text-underline:none; text-decoration:none; text-line-through:none;} a:visited, span.MsoHyperlinkFollowed {mso-style-noshow:yes; mso-style-priority:99; color:purple; mso-themecolor:followedhyperlink; text-decoration:underline; text-underline:single;} p.bodytxt02, li.bodytxt02, div.bodytxt02 {mso-style-name:body_txt_02; mso-style-unhide:no; mso-margin-top-alt:auto; margin-right:0in; mso-margin-bottom-alt:auto; margin-left:0in; mso-pagination:widow-orphan; font-size:12.0pt; font-family:”Times New Roman”,”serif”; mso-fareast-font-family:Calibri; mso-fareast-theme-font:minor-latin;} .MsoChpDefault {mso-style-type:export-only; mso-default-props:yes; font-size:10.0pt; mso-ansi-font-size:10.0pt; mso-bidi-font-size:10.0pt;} @page WordSection1 {size:8.5in 11.0in; margin:1.0in 1.0in 1.0in 1.0in; mso-header-margin:.5in; mso-footer-margin:.5in; mso-paper-source:0;} div.WordSection1 {page:WordSection1;} –>
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by Brenon Daly

From an investment banking perspective, both EqualLogic and 3PAR started out and finished their lives in much the same way. The two storage vendors filed to go public within a week of one another back in August 2007, and – pending the close of 3PAR’s sale – both will end up inside Dell. Yet while the final destination is the same, the two vendors’ not-so-parallel tracks to Round Rock, Texas, underscore the fact that the tech M&A market, as well as the capital markets, still have a long way to go to recover from the Credit Crisis.

Consider this: In the sale announced Monday, 3PAR garnered just half the multiple that fellow storage vendor EqualLogic got in its sale to the same buyer, at least based on one key metric. 3PAR sold for 5.6 times trailing sales, while EqualLogic went for 12x trailing sales. We would chalk up the eye-popping premium for EqualLogic mostly to the fact that Dell had to effectively outbid the public market to prevent the company from going public. More to the point, Dell had to outbid a bull market, as the Nasdaq had tacked on 20% in the year leading up to its purchase of EqualLogic in November 2007.

As any company – including 3PAR and Dell – can attest, the bull market ended abruptly and painfully just days after the EqualLogic trade sale. So now we’re left with a market where Dell can offer the highest-ever price for 3PAR shares (representing a staggering 87% premium) and still get a ‘half-off discount’ on valuation compared to its earlier billion-dollar storage deal. But then Dell knows all about discounts over that time period. The company’s market cap has been cut in half (to $25bn from $50bn) from the day it announced its EqualLogic acquisition to Monday’s announcement of the 3PAR purchase. e

A bummer of a summer

Brenon Daly

Contact: Brenon Daly

Since we’re right at the midpoint of the third quarter, we thought we’d check up on recent deal flow. (For all of the pre-decimalization Wall Street traders out there, this means that 2010 is now five-eighths in the book.) When we ran the M&A numbers for Q3 so far, we found that it’s been a bummer of a summer for dealmakers: The number of transactions from July 1 to August 15 hit a six-year low.

For the six-week summer period so far this year, the number of deals totaled just 373 transactions, only a slight 3% decline from the recent low (386 deals during the same period in 2008) but a whopping 30% drop from the recent high (530 deals during the same period in 2006). Further, the scant spending in the period so far puts the full third quarter on track to hit just the low end of the range we’ve seen since the Credit Crisis erupted. And that’s coming after a post-recession M&A spending record notched in the second quarter. (See our full Q2 report.)

There are a number of reasons for the light activity. The stock market has been weak lately, with the recent slide leaving the Nasdaq underwater for the year. So far in August, the Nasdaq has registered seven down days compared to three days when it closed in positive territory. During that same period, the uncertainty in the market – as represented by the Chicago Board Options Exchange’s Volatility Index – has moved from the low-20s to the mid-20s. Risk and uncertainty tend to work against M&A, either by prolonging negotiations or killing deals altogether.

Mid-Q3 M&A totals

Period Deal volume Deal value
July 1-Aug. 15, 2010 373 $16.2bn
July 1-Aug. 15, 2009 403 $11.9bn
July 1-Aug. 15, 2008 386 $18bn
July 1-Aug. 15, 2007 427 $35.2bn
July 1-Aug. 15, 2006 530 $55.5bn
July 1-Aug. 15, 2005 383 $37.9bn
July 1-Aug. 15, 2004 244 $10bn

Source: The 451 M&A KnowledgeBase

Do-or-die time for LANDesk divestiture

Brenon Daly

Contact: Brenon Daly

It’s do-or-die time for the LANDesk divestiture, with the period of exclusivity with the most serious bidder set to expire Friday. Buyout shop Thoma Bravo is said to be the last remaining party at the table for the systems management vendor, which Emerson Electric has been trying to shed for more than six months. The current betting is that Thoma Bravo, which has done a half-dozen deals so far this year, will not take home LANDesk.

Thoma Bravo, of course, already has a play in this market – one that it got thanks to another public company divestiture. The private equity (PE) firm picked up the IT asset management division from Macrovision (now known as Rovi) in February 2008, renaming the business Flexera Software. Flexera has since bolted on four other businesses, including the purchase of ManageSoft in May. As my colleague Dennis Callaghan has noted, the hypothetical pairing of Flexera and LANDesk would bring some overlap, but would add technology for endpoint security management, service desk, remote control, power management and application virtualization that Flexera doesn’t have on its own.

While the combination makes sense strategically, we have heard that the process is snagged financially. Several sources have indicated that the asking price for LANDesk has come down from more than $300m early in the process to $250m now. (LANDesk sold for $416m back in April 2006 to Avocent, which was subsequently acquired by Emerson.) At the current level, LANDesk would be valued at more than eight times EBITDA, according to our understanding. That might prove a little rich for Thoma Bravo.