Category: investment banking

Server maker Verari resurfaces under original founder

Brenon Daly

Contact: John Abbott

We noted last month that Verari Systems had run into trouble, and to avoid bankruptcy was planning to auction off its assets under an Assignment for the Benefit of Creditors agreement. The auction, run by the Credit Management Association, duly took place earlier this month. The successful bidder was none other than an investment group led by original founder Dave Driggers, who acquired ‘substantially’ all of Verari’s corporate and intellectual property assets. The company restarts under the modified name Verari Technologies, with less than one-third of the original headcount of 235, according to our understanding.

There are very few details of the transaction, and not many indications of how the new Verari will be different from – and avoid the same fate as – the old Verari. The fact remains that it’s very hard for a small company to compete in the hardware business against giants like IBM, Hewlett-Packard and Dell. The focus this time will be on datacenter design and optimization services, modular container-based datacenters, blade-based storage and high-performance computing, the vendor said in a statement. The new company now owns all of Verari’s inventory, equipment and technologies, and will immediately start supporting the existing installed base of Verari customers.

High-profile signup David Wright, previously at EMC, took over as CEO in 2006, while Driggers stayed on as CTO. The hints are that Verari will no longer try to compete in the general-purpose server and storage markets but will instead focus on niche segments, particularly those where customers require a degree of customization and consultancy, and work more closely with other industry partners. Those partners could include Cisco, which had been working with Verari on containerized datacenters before the crash. The new Verari will also work on licensing and promoting its patented intellectual property in areas such as system packaging (including blade chassis and containers) and vertical cooling.

Talk was cheap in 2009

Brenon Daly

Contact: Brenon Daly, Thomas Rasmussen

We are currently tallying up deal credits for our annual league tables. Although we’re still a few weeks away from revealing our overall rankings of the investment banks, we have pulled out a couple of interesting trends. One observation that underscores just how brutal M&A was last year is that the premium valuation that sellers typically garnered by using an adviser got all but erased in many sectors. Overall, the numbers make it indisputably clear that 2009 was a buyer’s market.

The specific valuations vary across sectors, but the software industry stands as fairly representative of this trend. In 2007, selling companies that used an adviser garnered, on average, 3.3 times trailing 12-month (TTM) sales while selling companies that didn’t use an adviser received 2.1x TTM sales. The gulf narrowed in 2008 (2.4x TTM sales for advised deals vs. 1.9x TTM sales in transactions without advisers), and essentially disappeared last year (1.4x TTM sales for advised deals vs. 1.3x TTM sales in transactions without advisers). Again, we don’t think the trend reflects the quality or value of sell-side investment banking advice as much as it indicates how few buyers were actually in the market last year. After all, it doesn’t matter how silver-tongued investment bankers may be if they’re speaking to empty chairs around the negotiating table.

salesforce.com: All dressed up and nowhere to go

Brenon Daly

Contact: Brenon Daly, China Martens

We noted late last week that it has emerged recently that salesforce.com did indeed make an (unannounced) acquisition to help bolster its upcoming enterprise collaboration product, Chatter. The purchase of GroupSwim, which had just 30 customers, was undoubtedly a tiny one. That’s been the case in the five previous buys by salesforce.com, as well.

But now, the market is buzzing that salesforce.com may be looking to take on a larger deal. Why else would a profitable company that already has $1bn on its hands raise another $500m in an upcoming convertible offering? If that sort of reasoning worked for Occam, then it’ll work for us. All that remains, then, is to figure out where salesforce.com is going to spend that money.

It turns out that coming up with a shopping list for salesforce.com is actually a bit more complicated than it is for many other companies. For starters, the firm positions itself as a platform vendor, which means that it is designed to be open and inclusive. That is exactly counter to M&A. So while it might make sense for salesforce.com to move into marketing automation (MA), for instance, by picking up Unica or Constant Contact Inc, a play like that would immediately alienate all other MA providers on AppExchange. (Currently, there are 29 different MA applications listed on AppExchange, among more than 170 applications in the broader ‘marketing’ category.)

Salesforce.com has worked around that by looking more to partner than purchase, as it did to co-create FinancialForce.com, a partnership with Unit 4 Agresso. Clearly, salesforce.com could afford to buy Unit 4 Agresso outright. (The Dutch company has a market capitalization of about $650m.) We suspect that partnerships might be the approach that salesforce.com uses to cover human capital management (HCM). A number of rumors have tied the CRM giant to either of the big HCM players, Taleo or SuccessFactors. (As an aside, we might be willing to pay money to listen to any M&A negotiations between salesforce.com’s laidback, New Age-y chief executive Marc Benioff and the blunt-talking, hard-driving CEO at SuccessFactors, Lars Dalgaard. We can only imagine the look on Dalgaard’s face if Benioff invited him to sit zazen, which wouldn’t be out of character for the salesforce.com honcho.)

So having scratched most names, what’s one company that we could imagine salesforce.com reaching for? InContact. The acquisition would boost salesforce.com’s Service Cloud, taking the firm even deeper into the call center. The (hypothetical) deal would fit nicely with InStranet, which salesforce.com acquired in mid-2008 for $31.5m, and would hardly break the bank. InContact has a market capitalization of merely $90m. And as a final bonus, salesforce.com would finally be able to shed its limited ticker ‘CRM’ in favor of the bigger, more encompassing ticker of ‘SAAS,’ which is what inContact currently trades under.

Cadbury gets sweet deal; Yahoo sours

Brenon Daly

Contact: Brenon Daly

When Kraft Foods first launched its bid for Cadbury four months ago, we termed the offer ‘an Old Economy rendition’ of Microsoft’s reach for Yahoo in early 2008. And while it wasn’t a direct parallel, there were a number of similarities: A diversified, dividend-paying company makes an unsolicited play for a target that’s only just into a restructuring program, with a goal of bolstering a business where it’s currently an also-ran.

The parallels diverged even wider on Tuesday, as the British confectioner agreed to a raised bid from Kraft. Cadbury shareholders will pocket $19.5bn in cash and Kraft stock for their company, about 11% higher than Kraft initially offered. It represents the highest-ever price for Cadbury stock on the London Stock Exchange.

So that’s the reward to shareholders from a selling company. What about on the other side? What’s happened to the owners of Yahoo since the Internet giant spurned the advances of Microsoft (as Cadbury once dismissed the interest of Kraft)? Shares of Yahoo currently trade at just half the level that Microsoft bid for them. And it isn’t just the fact that shares got hit by the biggest economic upheaval since the Great Depression since Yahoo turned down Microsoft’s interest. In the nearly two years since that decision, the Nasdaq has basically flat-lined while Yahoo stock has dropped by one-third.

A short-lived bid for Chordiant

Brenon Daly

Contact: Brenon Daly

In many ways, CDC Software’s unsolicited bid for Chordiant Software was over before it even began. As it was, the end became official late Thursday, as CDC Software pulled its $105m cash-and-stock offer for the money-losing CRM vendor just a week after floating it. It was clear that the hastily assembled ‘proactive offer’ (as CDC Software referred to it) was never going to get very far with Chordiant. Shares of the company spent virtually all summer above CDC Software’s bid of $3.46, which reflected a scant 14% premium over the closing of Chordiant shares in the previous session.

Chordiant, advised by Morgan Stanley, brushed aside CDC Software’s proposal with the ever-popular dismissal that the bid ‘significantly undervalues’ the company. (CDC Software didn’t retain an adviser, we understand.) Chordiant’s rebuff, combined with the poison pill it has in place, effectively killed the deal. CDC Software pretty much acknowledged that earlier this week when it announced that it intended to unwind its tiny 1.3% stake in Chordiant, which totaled just less than 400,000 shares. Incidentally, speaking of shares, although Chordiant stock dipped a bit when CDC Software pulled its offer, it was still closed above the bid price on Friday.

Plenty of capital for Human Capital Management buyers

Brenon Daly

Contact: Brenon Daly

For the fragmented market segment called human capital management (HCM), we’d put the emphasis on ‘capital.’ Both of the two largest public HCM vendors (Taleo and SuccessFactors) have done secondaries in recent months, despite already having pretty fat treasuries. Taleo, which held some $77m in cash at the end of the most recent quarter, sold more than $130m worth of stock in late November. That offering came a month after rival SuccessFactors, which held $122m in cash, raised some $215m in its secondary.

Despite all the cash, neither player has been particularly concerned with using it to go shopping. SuccessFactors has never bought a company while Taleo has inked just one deal in each of the past two years. In May 2008, Taleo consolidated rival Vurv Technology for $128.8m in cash and stock. Last September, it spent $16m in cash for startup Worldwide Compensation, an acquisition that followed an initial early investment in the compensation management vendor. We have noted for some time that both SuccessFactors and Taleo are likely to be busy, and in fact, we heard gossip that SuccessFactors came very close to closing a deal at the end of 2009, but it fell through.

We were thinking about all this potential M&A last week, when one of the HCM rollups got rolling. Authoria, which is owned by buyout firm Bedford Funding, announced its first deal since it got snapped up in September 2008. We estimate that the $100m purchase of Peopleclick will more than double Authoria’s revenue. Not that the deal tapped out Authoria’s bank account, either. It still has some $700m to spend. Adding up the money the would-be buyers (both financial and strategic) have to shop in this market, we expect HCM deals to follow in 2010.

Deals on the rebound

Brenon Daly

Contact: Brenon Daly

More than 100 people dialed into our webinar earlier today, joining us in a discussion of whether the tech M&A rebound is real. And while not everyone agreed that deals will flow smoothly – and voluminously – in 2010, there was a shared sense that the M&A recession of 2009 has mostly lifted. Still, a rebound is one thing, while recovery is something else entirely.

We have definitely seen the pace of dealmaking pick up so far in 2010. We noted earlier that we tallied 60% more deals in the first workweek of this year than during the same period last year, and both tech investment bankers and corporate development executives have forecast a busier year for M&A in 2010. If you’d like to get a copy of our slides from this morning’s webinar, send us an email.

Companies buying early and often in 2010

Brenon Daly

Contact: Brenon Daly

Maybe it was just working through the backlog of deals from the holiday break, but M&A has started strongly in 2010. We previously noted that a number of big tech buyers have already announced deals this year. (The list of acquirers in the first workweek of January includes EMC, Oracle, Cisco Systems and Apple, among others.) Overall, we tallied 85 transactions in the first week back at our desks, a stunning 60% increase over the first workweek of 2009.

Granted, making projections from a single week is a bit dubious because of the small sample size. Yet while it may not be unerringly precise, it will likely prove directionally accurate. Consider how M&A played out in 2009. In the first week of January, we counted just 53 transactions, giving a projected total for the year of 2,756 deals. That turned out not to be too far off the actual total for 2009 of 3,005 transactions.

If we make the same calculation based on the 85 deals that we counted in the first workweek of this year, we get a projected total of 4,420. That will likely prove too high for the year since it would substantially eclipse the record activity we saw in the boom year of 2006, when there were a lot more buyers at the table. Still, the busy start to 2010 does appear to indicate that this year will be more active than last year. If you are interested in our full outlook for M&A in 2010, join us on our webinar tomorrow at 10:00 a.m. PST/1:00 p.m. EST. To register, click here.

Chordiant: hunter turns hunted

Brenon Daly

Contact: Brenon Daly

Just a month ago, Chordiant Software was a hunter. Now it’s the hunted. The call-center software vendor attracted an unsolicited – and rather unsatisfying – offer from CDC Software earlier this week. The unusual twist is just the latest development in the already unusual process around the sale of fellow software company Kana Software. Recall that Chordiant, after failing to land Kana, took to sniping at the deal as an activist shareholder. None of that had any impact, as the sale of Kana to midmarket buyout firm Accel-KKR closed in late December.

Chordiant’s unsuccessful bid for Kana came up in CDC’s rationale for making what it terms a ‘proactive’ offer for Chordiant, with acquisitive CDC saying the bid was partly driven by Chordiant’s recognition that it was a ‘sub-scale’ software company. And recently, Chordiant has been falling even further away from being a software vendor of scale. In its most recent fiscal year, which ended September 30, overall revenue dropped by one-third. Granted, that fiscal year covered one of the most difficult economic periods since the Great Depression. But even in the current fiscal year, most Wall Street analysts don’t project that Chordiant will grow much, if at all.

So what does all that mean for Chordiant, which has remained silent to this point on CDC’s offer of $105m in cash and stock? We suspect it’ll probably play out similarly to CDC’s bid in 2006 for another CRM provider, Onyx Software. In that would-be acquisition, CDC was also an unwelcome bidder for Onyx, and the process unfolded fitfully. (Onyx ultimately sold to rollup Consona.) Not that we’re saying CDC will necessarily pull its bid for Chordiant, as it did for Onyx.

Instead, on the other side, we suspect Chordiant will try everything in its power not to end up inside CDC. One key defense: Chordiant has a poison pill in place that doesn’t expire until mid-2011. Also, Chordiant shares are currently changing hands above CDC’s offer of $3.46 for each of them. So if CDC, which is planning to hit the road next week to help sell Chordiant investors on the deal, really wants to add Chordiant’s front-office products to its existing back-office wares, we think it’ll have to present a topping bid. On a call discussing the proposed transaction Friday, CDC chief executive Peter Yip said he’s ‘open minded’ to raising the offer.

Survey says: Companies ready to deal again

Brenon Daly

Contact: Brenon Daly

This year’s fast start to M&A activity by several of the big-name tech buyers (EMC, Cisco Systems, Apple and Oracle, among others) shouldn’t surprise us at all. After all, when we surveyed corporate development executives last month, two-thirds of them said they expected their firms to pick up the pace of dealmaking in 2010. That’s a far more bullish outlook than their projections last year, when the entire financial services industry and much of the broader economy appeared to be collapsing. At that time, some 23% of respondents said they expected to actually slow their acquisition activity amid all the uncertainty that loomed in the coming year. In our most recent survey, just 5% said they see a slowdown in dealmaking.

We’ll have a full report on the results of our annual 451 Group Tech Corporate Development Outlook Survey in tonight’s Daily 451 and 451 TechDealmaker sendouts. But we would add that the bullishness for M&A in the coming year expressed by our respondents extends far beyond just their projected activity. In both the types of transactions and even the structure of them, companies indicate that they have thrown off much of the conservatism and caution that characterized their outlook in late 2008 and are once again open to risk. And finally, they plan to be busy even though they tell us they’re likely to pay more in the deals they ink in 2010. It’s a dramatic turnaround from the previous year, so look for the full report on the survey tonight.

Projected change in M&A activity in the coming year

Year Increase Stay the same Decrease
2009 68% 27% 5%
2008 44% 33% 23%

Source: The 451 Group Tech Corporate Development Outlook Survey