Category: investment banking

VMware: a ‘table-clearing’ bid for the clouds

Brenon Daly

Contact: Brenon Daly

About a year and a half after Paul Maritz got picked up by EMC, the former Microsoft honcho has struck his signature deal for his new employers. When EMC reached for Pi Corp, which had yet to release a product, we figured the move was basically ‘HR by M&A.’ And that has turned out to be the case, as Maritz took over leadership of EMC’s virtualization subsidiary VMware in July 2008. He stepped into the top spot just as VMware’s once-torrid revenue growth had dwindled to a trickle. Sales at VMware rose 88% in 2007 and 42% in 2008, but are projected to inch up just 2% this year.

To help jumpstart VMware’s growth, Maritz looked to the clouds, pushing through the acquisition of SpringSource earlier this week. At roughly twice as much as VMware has spent on its previous dozen deals, the SpringSource buy is the virtualization kingpin’s largest purchase. It was also, as we understand it, a deal very much driven by Maritz. (Because the purchase topped $100m, it also had to be blessed by VMware’s parent, EMC. This indicates that Maritz enjoys a level of support at the Hopkinton, Massachusetts, HQ that probably wasn’t extended to his predecessor, VMware founder Diane Greene.)

As we have noted, no bankers were involved in negotiations and one source indicated that terms were hammered out directly by Maritz and his counterpart at SpringSource, Rod Johnson, in a scant three-and-a-half-week period. Not that there was much negotiating needed. As we understand it, Maritz approached Johnson with a ‘table-clearing’ offer of $400m. SpringSource didn’t contact any other potential buyers, and in fact, the five-year-old startup only weighed VMware’s bid against the possibility of going public in 2011. (Subscribers to the 451 M&A KnowledgeBase can click here to view our estimates on SpringSource’s revenue, both trailing and projected, as well as its valuation.)

However, the source added that getting to an IPO would have likely required another round of funding for SpringSource. The dilution that would come with another round, combined with the deep uncertainty about the direction of the equity markets, tipped SpringSource toward the trade sale. In the end, that decision – and how Maritz executes on his step into application virtualization – will go a long way toward shaping his legacy at VMware.

Will Fortinet go shopping after going public?

Brenon Daly

Contact: Brenon Daly, Paul Roberts

Not that Fortinet actually needs more cash to go shopping, but the company will likely substantially fatten its treasury by the end of the year. Officially, the security vendor, which has been generating cash for the past three years, said in its IPO prospectus this week that it plans to raise $100m. However, we suspect the actual amount that it raises could be as much as $200m, a fitting offering for a firm that may well hit the market with a valuation in the neighborhood of $1bn. (Which exchange Fortinet debuts on is still undecided. We can only imagine the fight between the NYSE and the Nasdaq over listing a big-time IPO like Fortinet in such a lean time for new offerings.)

Whatever the amount of money Fortinet ends up raising in the offering, it will have plenty to go shopping. (Not to mention the fact that it will also have freshly minted shares if it wants to do a larger deal.) My colleague Paul Roberts, who heads our security practice, put together a possible shopping list for the company back in April, based on our understanding that Fortinet was a few months away from filing to go public. Roberts discussed a number of possibilities for Fortinet, including network access control and perhaps WAN traffic optimization.

However, he argued that Fortinet would perhaps be best served by making a play for an enterprise security information management (ESIM) provider to make sense of all the information generated by the various offerings. And, as fate would have it, Fortinet already knows one ESIM vendor rather well. Since 2004, the company has been OEMing eIQnetworks’ Network Security Analyzer and reselling it as FortiReporter.

EMC and advisors: All or nothing

Brenon Daly

Contact: Brenon Daly

After EMC doled out no fewer than nine credits to different banks for working on its acquisition of Data Domain, we were curious how the deal credits would flow around the largest-ever purchase by EMC subsidiary VMware. (The unusually long list of advisers for EMC on Data Domain made us think – of all things – about the quip about compensation under some communist regimes: People pretended to work and the government pretended to pay them.) As it turns out, EMC/VMware swung to the other extreme, with not a single bank working for the virtualization giant in its purchase of SpringSource.

That’s not unusual, since VMware hadn’t really used bankers in the dozen or so acquisitions that it had inked before SpringSource. But those deals were mostly small. In fact, the cumulative spending for all of its earlier buys totals only about half of the $420m in cash and stock that VMware is set to hand over for SpringSource. By our tally, VMware’s pending purchase is the third-largest pickup of a VC-backed tech firm so far this year. Not that the print will show up for any bank. SpringSource didn’t use an adviser, either.

Versata bags Everest

Brenon Daly

Contact: Brenon Daly

In half of the recent buys by Versata Enterprises, Updata Advisors has worked on behalf of the acquisitive enterprise software provider. In the latest purchase, however, the boutique advisory firm swung to the other side of the desk. On Friday, Versata, the Austin, Texas-based company that used to go by the name Trilogy, picked up Everest Software for an undisclosed sum. (We hear from a source that Everest was running at a bit more than $10m in revenue. However, the vendor’s top line suffered recently because it sold predominantly to retailers, as well as SMB customers – both of which have been hit disproportionately hard by the ongoing recession.)

Since December 2007, Updata has advised Versata on its acquisitions of Nuvo Network Management, TenFold and Evolutionary Technologies International. Switching over to the sell side for Everest is perhaps understandable for Updata because its sister firm – Updata Partners, which does venture investing – had put money into the CRM vendor. Other backers of Everest include Sierra Ventures, Boulder Ventures and Actis Capital. Founded in 1994, Everest had pulled in around $20m in funding.

Incidentally, we would note that in a press release announcing its sale, Everest took the unconventional step of thanking all of its backers. Even though we understand that the investments in Everest didn’t necessarily produce the returns that had been hoped for, it’s nonetheless a classy move by Everest. Too few companies do that. Most executives and investors simply and quietly move on to ‘the new, new thing’ without taking time to acknowledge the money and time that people put into the first venture. So the sale of Everest probably wasn’t a high-dollar deal, but the firm did take the high road.

A first for Google: reaching for a public company

Brenon Daly

Contact: Brenon Daly

In the five years since Google went public, the serial shopper has picked up some 40 other companies. It has bought its way into security, collaboration software, mapping, video and voice, among other areas. And it has inked deals ranging from the low seven figures all the way up to $3.1bn for DoubleClick. But in all of its shopping, Google had never reached for a fellow public company. That changed Wednesday with the search giant’s announced $106m purchase of Amex-listed On2 Technologies. The transaction is expected to close by the end of the year.

Fittingly for a vendor that hangs ‘beta’ tags on products for years, Google didn’t immediately indicate its plans for On2. But we suspect that the video compression technology that On2 developed could well come in handy to lower bandwidth costs and sharpen up the performance of Google’s YouTube property, for instance. (Whatever the strategy, we’re pretty confident that the deal was a pure technology acquisition. Google certainly didn’t snag On2 for its financial performance. Money-burning On2, which has rung up an impressive $183m in accumulated deficit since its founding in 1992, has had negative working capital so far this year.)

As an aside, we would note that there are actually a few ties between Google’s YouTube buy and its pending pickup of On2. Both transactions are the only ones we’re aware of where Google used its own equity to cover the purchase price. (For those On2 shareholders who might be curious, Google shares have handily outperformed the market since the vendor handed over $1.65bn worth of stock to YouTube owners. Google shares are up about 12% since the company announced the YouTube deal in October 2006, compared to a 12% decline in the Nasdaq over that period.) Also, even though Google rarely uses a sell-side adviser, Credit Suisse Securities banked the search giant in both deals. In fact, we understand that the same banker, Credit Suisse’s Storm Duncan, handled the two acquisitions. Duncan worked across the table from Covington Associates’ Tom Cibotti, who advised On2.

SaaS deals echo in security industry

Brenon Daly

Contact: Brenon Daly

There are more than a few echoes of Symantec’s purchase of MessageLabs last October in McAfee’s reach last week for MX Logic. In terms of strategy, both acquisitions added millions of end users of on-demand security to the two largest security software companies, which have been slowly looking to increase that side of their business. MessageLabs had attracted more than eight million users at 19,000 customers, while MX Logic brings more than four million users at 30,000 customers.

As far as deal terms go, both buys were done at a similar valuation. Symantec paid 4.8 times trailing sales for MessageLabs, while we estimate McAfee is paying closer to 4 times trailing sales for MX Logic. (If we include the potential $30m earnout in the price, the multiple hits 4.9 times MX Logic’s trailing revenue.) And, we would add that both deals stand as the largest security transactions of their respective years, with the sales of these private software-as-a-service (SaaS) companies eclipsing the prices paid even for public vendors. Symantec shelled out $695m in cash for MessageLabs, topping McAfee’s $497m pickup of Secure Computing as the largest security deal in 2008. So far this year, McAfee’s $140m purchase of MX Logic is the industry’s biggest security transaction, slightly ahead of the contested take-private of Entrust for $124m.

We also suspect that both SaaS acquisitions will pay dividends for Symantec and McAfee. (We have heard from several sources that Symantec is particularly high on its reach across the Atlantic for MessageLabs.) Undoubtedly, these deals will deliver a higher return than the other large SaaS security acquisition, Google’s pickup of Postini. Done two years ago, that buy handed Postini a valuation that’s twice as rich as either MessageLabs or MX Logic. But unlike the moves by Symantec and McAfee, Google didn’t snag Postini for its security offering. Instead, the search giant had the ill-conceived notion that a startup could serve as the platform for its push of Google Apps. Not surprisingly, that idea hasn’t panned out. We certainly haven’t heard much about Postini in the two years since the search giant bought it.

id Software exit signals continued consolidation in gaming

-Contact Thomas Rasmussen

While we have been expecting continued consolidation in the gaming sector for a long time now, we didn’t see this combination coming. Id Software, a staunchly independent, Mesquite, Texas-based shop best known for founder John Carmack and the Doom franchise, sold recently to Rockville, Maryland-based ZeniMax Media. ZeniMax is a relatively small, privately held publisher, having picked up Bethesda Software in 2001. However, the firm has wealthy backers. It raised $300m in 2007 from private equity shop Providence Equity Partners and according to a US Securities and Exchange Commission filing, raised another $105m in debt financing on July 7, which was specifically earmarked for the acquisition of id. Given that ZeniMax undoubtedly wants to retain id’s employees (even giving a seat of the board to id CEO Todd Hollenshead), we suspect ZeniMax also had to tap into its equity to cover the purchase price, which wasn’t revealed.

This deal makes us wonder about the outlook for the remaining independent legacy videogame studios. Specifically, we’re referring to Bellevue, Washington-based Valve Corp and Cary, North Carolina-based Epic Games. Not that we’re suggesting any formal shopping is taking place. But if the id exit shows us anything, it is that in a time when development costs are skyrocketing and financing is harder to come by, it might be wise for studios to join forces with a larger publisher. That’s particularly true as the current economic slump has painfully shown that the videogame industry is not as ‘recession-proof’ as some people had hoped. Shares of Electronic Arts, which serve as a kind of proxy for the entire videogame industry, have been cut in half over the past year, compared to a mere 6% decline in the broader software stock index during the same period.

Videogame-related M&A by the big four, 2006-present

Acquirer Number of acquisitions Total known deal value
Activision Blizzard 10 $5.69bn (includes merger with Vivendi)
Electronic Arts 9 $771m
Microsoft 4 $235m
Sony 6 N/A

Source: The 451 M&A KnowledgeBase

Advisors in EMC-Data Domain: a chorus and a solo

Brenon Daly

Contact: Brenon Daly

It’s often said that there are three types of falsehoods: lies, damn lies and statistics. To that list, we might be tempted to add a fourth category: league tables. That’s in the front of our minds because we just put together our mid-2009 update to the rankings of the busiest tech banks. (For those curious, Credit Suisse Securities took the top honor, with more deals and more dollars advised than any other bank. Banc of America Securities and JP Morgan Securities rounded out the podium.)

To be clear, we’re not saying that banks make up deal credits. Instead, we’re just noting that the credits, like statistics, may be more malleable than most people think. As we tally the transactions to come up with our rankings, there are invariably deals that smack of a little gamesmanship. In this case, it’s the chorus of advisers for EMC in the storage giant’s purchase of Data Domain. No fewer than eight banks – ranging from bulge brackets to a high-end boutique to even a midmarket firm – are all claiming credit for EMC. (We confirmed, indirectly, with EMC that each of the banks did indeed play a role in the acquisition.)

Meanwhile, on the other side, boutique advisory firm Qatalyst Group took sole credit for working the sell-side for Data Domain. Some observers initially dinged Frank Quattrone’s shop for running such a narrow process. (We understand, for instance, that EMC didn’t see the initial book on Data Domain when NetApp was preparing its bid.) Whether that’s the case or not is largely academic at this point, since the transaction closed a week ago. And it’s largely irrelevant, given where the deal was ultimately done. Data Domain enjoyed the richest price-to-revenue multiple in the sale of a US public company since March 2008.

UPDATE: After initially publishing this piece, Bank of America Merrill Lynch reached out to us to say that they, too, should have a deal credit for advising EMC. For those of you keeping score at home, that brings the total number of advisors for EMC, which was working to land Data Domain for all of two months, to nine separate banks.

Credit Suisse tops mid-2009 league table

Brenon Daly

Contact: Brenon Daly

In the midyear update to our league table, Credit Suisse Securities has emerged as the busiest adviser in tech M&A for the first two quarters of 2009. It was a dramatic rebound for Credit Suisse, which fell out of the top 10 in 2008 after ranking third in 2007. The bank owes much of its standing to its role in helping to sell Sun Microsystems to Oracle, which was the tech industry’s largest deal since mid-2008. (Our league table is based on acquisitions of US-based IT businesses that were announced – but not necessarily closed – in the first half of the year.)

But it wasn’t just the one whopper deal that put Credit Suisse on top. In fact, the bank not only advised on the highest amount of tech M&A spending ($10.4bn), it also advised on the largest number of transactions (10). That’s even more noteworthy since Credit Suisse did not participate in the wave of consolidation that has swept through investment banking over the past year. The next two firms in our rankings both bolstered their tech banking practices by doing some M&A of their own.

Banc of America Securities, which ranked second on our midyear league table, has enjoyed a significant boost in its tech advisory business since it closed its purchase of Merrill Lynch on January 1. The combined entity advised on six deals worth some $8.3bn so far this year. Just behind Banc of America is JP Morgan Securities, which added Bear Stearns in a distressed sale in mid-2008. JP Morgan ranked third, with five deals valued at $8bn. We will have the full standings and analysis on the midyear league table in a special report that will be included in tonight’s Daily 451 sendout.

League table standings, midyear 2009

Bank Number of deals Amount of spending
Credit Suisse Securities 10 $10.4bn
Banc of America Securities 6 $8.3bn
JP Morgan Securities 5 $8bn

Source: The 451 M&A KnowledgeBase

IBM’s ‘Tuesday twofer’ still leaves it behind most years

Brenon Daly

Contact: Brenon Daly

In a highly unusual move, IBM did the M&A equivalent of a ‘Tuesday twofer,’ buying both big and small yesterday. In terms of the high-dollar deal, Big Blue said it will hand over nearly $1.17bn in cash for predictive analytics software vendor SPSS. The purchase of SPSS is the company’s largest transaction since it shelled out $5bn for Cognos in November 2007. In fact, we suspect the $1.17bn paid for SPSS is roughly the same amount that IBM spent on the nine deals it has announced (many of them with prices undisclosed) since picking up Cognos.

On the smaller side, IBM also said yesterday that it has acquired startup Ounce Labs, which makes source code analysis software. Terms weren’t revealed, but we wouldn’t be surprised to learn that the amount IBM paid for Ounce Labs was just 1% of the price it forked over for SPSS. Ounce Labs had raised some $29.5m in venture backing.

As a final thought on Big Blue’s doubleheader yesterday, we would note that the two purchases double the number of acquisitions that IBM has announced so far this year. The total of four deals in 2009, however, is basically half the number it had announced by this time in any of the previous three years.