Category: investment banking

An Old Economy version of Microsoft-Yahoo?

Brenon Daly

Contact: Brenon Daly

Where have we heard this before? A diversified, dividend-paying company makes an unsolicited approach to a target that’s only just into a restructuring program, with a goal of bolstering a business where it’s currently an also-ran. Add to that, the would-be acquirer isn’t particularly known for its brass-knuckle M&A tactics, while the would-be acquiree is busy dealing with an activist shareholder. No, Microsoft isn’t reheating its offer for Yahoo from early 2008. Instead, it looks to us like Kraft Foods has borrowed that play in its reach for candy company Cadbury.

Actually, the Old Economy rendition of Microsoft-Yahoo appears to be simply a cheaper version. For starters, there’s deal size. Microsoft’s bid of some $45bn for Yahoo is nearly three times the amount that Kraft has initially put forward for Cadbury. (We say ‘initially’ because Cadbury is trading above Kraft’s current cash-and-stock offer.)

Also, Microsoft offered a substantially richer premium for Yahoo than Kraft has indicated for Cadbury, roughly twice the level. And, Microsoft’s bid valued Yahoo at roughly 32 times trailing EBITDA, about twice the multiple that Kraft is planning to hand over for its reluctant partner. Of course, none of the largess flowing from Microsoft was enough to sway Yahoo’s board or executives, much to the dismay of shareholders in the search company. Yahoo shares currently change hands at less than half the amount Microsoft offered for them some 18 months ago.

Goodbye Montgomery, hello ArchPoint

Brenon Daly

Contact: Brenon Daly

Following the historic upheaval at investment banks last fall, the changes have begun to filter down to the smaller firms, as well. For instance, Morgan Keegan & Co picked up tech boutique advisory shop Revolution Partners last December while hedge fund Ramius LLC has reached for Cowen Group in a deal that’s expected to close by the end of the year. And now we understand another change is set to play out in the tech banking business in the coming weeks.

A core quartet of bankers will be leaving Montgomery & Co to establish an independent tech M&A advisory firm, ArchPoint Partners. A source tells us that Rob Louv, Dan Williams and John Cooper will be ArchPoint’s managing partners, with Susan Blanco joining as a senior director. Initial plans call for San Francisco-based ArchPoint to possibly double its number of employees by the end of 2009, and perhaps double that figure again next year.

We are told the split from Montgomery will be pretty clean, with ArchPoint carrying over 10-20 existing clients. It has already brought in five or so clients on its own name, although the boutique won’t formally launch until next month. (ArchPoint already has its own license, and has no outside investors. Founders Cooper and Louv are backing the firm.) The split from Montgomery comes as the group has a bit of momentum behind it. Montgomery banked MX Logic in its sale to McAfee, the largest security transaction since last October and one that came with a refreshingly healthy multiple of 4 times MX Logic’s estimated sales.

Summer sun dries up deal flow

Brenon Daly

Contact: Brenon Daly

It really was the lazy days of summer, at least in terms of tech deal-making. With summer officially wrapping up on Labor Day, spending on M&A is running at less than one-fifth the level it has been in any of the three previous years. (For our purposes, we mark summer as beginning on Memorial Day and ending on Labor Day.) In that period this year, acquirers spent a mere $18bn – down from $139bn in the same period in 2008, $101bn in 2007 and $123bn in 2006.

And spending has slowed recently, dipping to just $4.3bn since August 1. (Nearly half of that came in a single transaction, eBay’s divestiture of its Skype property to a PE-led consortium.) Granted, it’s not uncommon for spending to dip in late summer, as even the hardest-working deal-makers look to kick back on the beach for a bit. But this year, it appears as if folks went ahead and remained on vacation. Speaking of which, we will not be publishing on Labor Day but will pick up again on Tuesday, the other side of summer.

PE group dials up Skype

Brenon Daly

Contact: Brenon Daly

Just a month after we speculated on an unconventional home for Skype Technologies, eBay found a rather unconventional home of its own for its VoIP subsidiary. Rather than go to Cisco, which is what we suggested as an (admittedly) far-flung idea, Skype has landed in a portfolio of a consortium led by tech buyout shop Silver Lake. Terms call for the group (Silver Lake, along with venture firms Index Ventures and Andreessen Horowitz, plus the Canada Pension Plan Investment Board) to hand over $2bn for two-thirds of Skype. EBay, which acquired Skype four years ago, will own the remaining one-third stake.

In most markets, a multibillion-dollar carve-out of a noncore asset led by a private equity (PE) firm would hardly be called ‘unconventional.’ (In fact, one could argue that type of transaction is precisely what PE firms should be doing.) But today’s market – even with the recovery that we’ve had – is hardly a healthy one. The equity markets have rallied, but investors – including the big investment groups that back the PE firms – are still skittish. Add to that, debt is still tough to come by. Those are the main reasons why buyout shops have been largely sitting on their hands recently, making a $2bn deal by a PE consortium a relatively unusual event.

Consider this fact: the Skype carve-out is the largest tech PE deal since May 2008. In fact, it accounts for almost half of all tech spending by buyout shops in 2009. So far this year, we’ve tallied 50 transactions that have an aggregate announced deal value of just $4.6bn. That’s one-third the amount during the same period last year ($13.1bn), and a mere fraction of the total the buyout barons spent during the same period in the boom year of 2007 ($101bn).

Unexpected partners in e-discovery dance

Brenon Daly

Contact: Brenon Daly

After a flurry of more than a half-dozen e-discovery acquisitions from mid-2007 to mid-2008, deal flow has dried up in the sector. Buyers during the active period included companies that, broadly speaking, have an interest in storing, managing and searching electronic information, including such tech giants as Seagate Technology, Iron Mountain and Autonomy Corp. Collectively, spending on all the e-discovery deals in that one-year period topped $800m.

And then, like the rest of the M&A market, e-discovery activity dropped off dramatically. In this vacuum, rumors started bouncing around. The main one, which we noted last October, had Symantec looking closely at Kazeon. The two companies have been partners for a year, with Kazeon able to integrate with Symantec’s Enterprise Vault and Enterprise Vault Discovery Accelerator. (We also did a broader matchmaking report on the sector right around that time.)

And while a pairing between Kazeon and Symantec may well have made sense, the e-discovery vendor ended up selling to EMC on Tuesday. (Terms were not disclosed, but one report put the price at $75m. We think that may well turn out to be a bit higher than the amount EMC actually paid, particularly since we understand that Kazeon was only running at about $10m in sales.) So we were a bit off on our pairing for Kazeon, just as we were off on our assumption that EMC would reach for its longtime e-discovery partner, StoredIQ. Undeterred by that, we find ourselves nonetheless wondering if StoredIQ will end up at Symantec. There’s certainly some logic to that pairing. But then again, that was also true for the other deals we came up with that never got signed.

ConSentry: more VC dollars for the NAC bonfire

Brenon Daly

Contact: Brenon Daly, Paul Roberts

It’s difficult – if not impossible – to point to any area of technology this year with a more consistently god-awful ROI than network access control (NAC). At this point, the return for VCs on their bets in the NAC market is literally pennies on the dollar. The latest addition to the imbalance between money invested and money returned: ConSentry Networks. As my colleague Paul Roberts recently noted, the company died earlier this month at least in part because it was counting on users defecting from either Cisco or Juniper Networks.

But that flawed business plan didn’t stop ConSentry from pulling down some $81m in backing over the past six years. The venture dollars incinerated by ConSentry brings the total amount burned by NAC vendors that have gone out of business in 2009 to at least $212m. Add to that the money raised by the one exit the NAC space has seen this year (Mirage Networks’ scrap sale to Trustwave), and the total swells to $252m. And the grand return on that quarter-billion-dollar cumulative investment? Mirage probably got about $10m for its business.

Bleak outlook for social networking M&A

-Contact Thomas Rasmussen

In a sign of just how far the social networking market has fallen, brightsolid’s $42m purchase earlier this month of Friends Reunited from ITV Plc stands as the largest deal in the sector so far in 2009. The price is a mere 5% of the value of the largest social networking acquisition in 2008, which was AOL’s $850m all-cash pickup of Bebo. (We would also add that the sale of Friends Reunited netted ITV just one-fifth the amount it originally paid for the property in 2005.) On top of the notably smaller transactions, deal flow so far this year has been characterized by relatively paltry valuations. Friends Reunited garnered just 1.6 times trailing sales, compared to the estimated 42 times trailing revenue that Bebo got from AOL. Add all that together and it’s pretty clear that the bubble of social networking M&A has popped. In the space so far this year, we tally just 28 deals worth a total of $55.5m, compared to 53 transactions valued at more than $1.3bn in 2008.

As an aside, we would note that the acquisitions of Friends Reunited and Bebo have more in common than just ranking as the largest deals of their respective calendar years. The stalking horse bidder for Friends Reunited, Peter Dubens through his investment vehicle Oakley Capital Private Equity, has a close business relationship with Bebo founder Michael Birch. Dubens and Birch formed PROfounders Capital earlier this year under Dubens’ Oakley Capital umbrella. Oakley Capital reportedly offered to buy Friends Reunited for $25m, but declined to bump up its bid above even one times sales. Without reading too much into that, we might be tempted to conclude that except for Facebook, the little value that remains in most social networks is likely to only decline.

Red Hat rumors: a reheat or something more?

Brenon Daly

Contact: Brenon Daly

When VMware reached for SpringSource earlier this month, the $420m pairing represented the largest open source transaction in a year and a half. Now, the market is buzzing with rumors about another blockbuster open source deal, one that would be more than 10 times the size of VMware-SpringSource. Several sources have indicated that interest in Red Hat has been heating up lately, with Oracle and IBM popping up again as suitors.

The rumors, of course, are nothing new. We have been speculating about a possible pairing between Red Hat and IBM or Oracle for almost three years. (When Oracle launched its own support of Linux back in 2006, we wondered if it wasn’t a ‘beat ’em down and take ’em out’ strategy from the coldhearted Larry Ellison.) And when the rumblings surfaced again earlier this year, we did some back-of-the-envelope thinking about a bid from Oracle. Honestly, though, we think Big Blue is a more likely buyer for Red Hat.

While the speculation stays largely the same, however, there is one change: the price of Red Hat keeps going up. Since we noted the latest reports of Oracle’s interest in late March, shares of Red Hat have tacked on about one-quarter in value. The company currently sports a market capitalization of $4.2bn; however, its cash holdings lower the effective purchase price to about $3.5bn. Red Hat is just now wrapping its fiscal second quarter, and has already said it expects revenue to be about $179m for the period. The vendor will likely report results in about a month.

Where’s the hurry in Oracle’s reach for Sun?

Brenon Daly

Contact: Brenon Daly

Having gotten the all clear on this side of the Atlantic, Oracle is now waiting for the EU to sign off on its pending purchase of Sun Microsystems. And the company will have to wait a bit longer. The European Commission has a deadline of September 3 to determine if the deal would violate antitrust measures. If the body decides that it does, a subsequent probe could potentially drag on into 2010.

Granted, there’s a lot at stake in Larry Ellison’s plan to use the acquisition of Sun to turn Oracle into a systems vendor, as opposed to a company that just sells software. (Provided the transaction goes through, Oracle will be in a position to hawk Solaris and Linux servers, all running its own database, middleware and application software on the boxes.) And, as the largest tech buy since Hewlett-Packard purchased EDS in May 2008, Oracle’s $7.4bn reach for Sun is clearly not nickel-and-dime M&A.

But the pace of the review by regulators is absolutely glacial. Consider this fact: It took Oracle just two months to fully negotiate its purchase of Sun, according to proxy material. (Sun chairman Scott McNealy spoke with Ellison about a possible deal in late February; the companies announced the transaction on April 20.) More than twice that amount of time has elapsed since Oracle announced the deal – and regulators in Europe are still mulling it over.

Sourcefire: No sale turns into a great deal

Brenon Daly

Contact: Brenon Daly

With Barracuda Networks looking to gobble up Austrian IT security vendor phion, we thought we’d look back on the other time the rapacious privately held firm eyed a public company. Last summer, Barracuda launched an unsolicited bid for Sourcefire, initially offering $7.50 per share but later raising that to $8.25. The bumped-up bid valued Sourcefire at roughly $215m, but that wasn’t enough for Sourcefire’s board of directors.

We’ve noted in the past that the decision by a company to go it alone can prove very costly to shareholders, at least in the near term. Removing the takeout premium and letting a company trade on its own fundamentals can end up crushing a stock. Recovering that lost ground can be a long and painful process. (Just ask shareholders of Yahoo and Mentor Graphics, who see shares in those companies changing hands these days at just half the level that suitors were willing to pay for them last year.)

However, it’s a completely different story for Sourcefire. It has actually turned out to be one of those rare cases where a target says a bid ‘undervalues’ the business and Wall Street agrees. After telling Barracuda to buzz off, Sourcefire shares got dragged down by the recession and traded below the bid until early April. But since then, the stock has surged to its highest level since the vendor went public in March 2007. Sourcefire shares are currently trading at about $20, or nearly 150% higher than the price Barracuda was willing to pay for them. Looked at another way, Sourcefire’s decision to stay independent has created more than $300m of additional value for its shareholders than the Barracuda bid would have delivered.