Category: investment banking

Turning down the trade sale

Brenon Daly

Contact: Brenon Daly

Since the Wall Street crisis erupted last fall, the M&A advice most companies have gotten has been not to sell unless they absolutely have to. That sentiment has quieted overall dealmaking activity, as well as pressured valuations across the board. It turns out that not even promising startups could escape the malaise. Later this afternoon, Tim Miller, our head of financial markets, will present our findings on the status of the AlwaysOn Global 250 to the seventh annual Summit at Stanford University. One key finding about the AO 250 startups: only 12 companies sold in the year since the previous conference, which is just half the number in each of the three previous years. Tech giants that have picked up AO 250 startups since the last conference include CA Inc, Omniture, Nokia and Hewlett-Packard.

While the number of trade sales declined notably for AO 250 companies, there was a significant pickup in the other exit option, an IPO. Three AO 250 companies managed to make it to the public markets over the past year, creating an aggregate market valuation of some $2.5bn. Those offerings came despite talk about the IPO window being closed. Further, all of them are trading above their issue price even though the broader market has been rather inhospitable lately. The Summit at Stanford opens Tuesday and runs through Thursday afternoon. For more details on the conference, see the event page.

Quiet close to Micro Focus-Borland after noisy process

Brenon Daly

Contact: Brenon Daly

After more than two months of back-and-forth negotiations, Micro Focus is set to take home Borland Software. Shareholders in Borland approved the $113m deal on Wednesday and Micro Focus shareholders signed off on it on Friday. Originally announced on May 6, the acquisition is set to close early next week. Along the way, Micro Focus had to pay 50% more than it originally bid, but still picks up the application lifecycle management vendor for just 1 times its sales.

The reason Micro Focus had to reach deeper into its coffers is that after the parties initially agreed to the transaction, at least two other shoppers popped up with offers of their own. Or more accurately, the would-be buyers indicated that they were interested in bidding. We already noted our suspicion that one of the pair was the recently launched 2SV Capital, although the firm didn’t pursue the nonbinding bid beyond an initial query.

As for the identity of the other suitor, which was identified only as Company A in US Securities and Exchange Commission filings, it turns out we were off with our guess of Embarcadero Technologies. In fact, we were off by about 3,000 miles. A source indicated that the mystery bidder was in fact Allen Systems Group, which has its headquarters in Naples, Florida. The privately held company has done some 30 acquisitions over the two decades it has been in business. We understand that the firm may have had trouble lining up the financing to top Micro Focus’ offer for Borland, which has an enterprise value of $164m. Allen Systems didn’t return several messages seeking comment.

With Data Domain done, what’s next for NetApp?

Brenon Daly

Contact: Brenon Daly, Simon Robinson

Data Domain was originally slated to report second-quarter earnings later this afternoon. Instead, the data de-duplication specialist is done as as an independent company, with the acquisition by EMC for the princely sum of $2.3bn closing today. The deal looks even ‘princelier’ when we consider the markdown M&A that we’ve been seeing recently. In fact, EMC’s bid values Data Domain at 7.4 times its trailing 12-month (TTM) revenue. That’s the richest multiple paid for a US public company since March 2008, when Ansys paid 8.2 times TTM sales for Ansoft.

Assuming the deal does indeed go through as expected, we wonder what will happen with the vendor that originally put Data Domain in play, NetApp. Certainly, the proposed pairing, which was approved by the boards at both firms, would have been a boost for NetApp. The storage system giant could certainly benefit from a midrange de-dupe product to serve customers beyond its existing base, which is precisely what Data Domain would have provided. The head of our storage practice, Simon Robinson, recently speculated that NetApp may well target other de-dupe providers. None of the potential candidates appears to fit as cleanly into NetApp as Data Domain would have, but there are nonetheless cases to be made for both CommVault and ExaGrid Systems.

While CommVault does indeed offer de-dupe technology, its backup software would pose a tricky integration challenge for NetApp, which sells appliances as an alternative to traditional backup software. (Keep in mind, too, that NetApp’s M&A track record hardly inspires confidence.) Meanwhile, ExaGrid is a company that in many ways has shaped itself in the image of Data Domain, albeit while selling de-dupe appliances. Buying ExaGrid wouldn’t bring NetApp the same heft as picking up Data Domain, but it would fit nicely into its focus on the SME market. If nothing else, NetApp could put some of the windfall of the $57m breakup fee that it received from the Data Domain deal toward another de-dupe move.

A happy anniversary for Brocade-Foundry

Brenon Daly

Contact: Brenon Daly

As far as Wall Street is concerned, nothing has really happened to Brocade Communications over the past year. Shares in the storage and networking vendor trade exactly where they did this time last July. And yet, there have been monumental changes at the company during that time. Exactly a year ago today, Brocade announced its largest and riskiest deal: the $3bn purchase of Foundry Networks. The transaction faced a number of challenges, both in terms of strategy and execution. And compounding those difficulties was the fact that Brocade would be closing the acquisition during the most severe economic slowdown since the Great Depression.

For starters, Brocade was planning to borrow some $1.4bn of the $3bn purchase price. In normal times, that wouldn’t be a problem for a cash-producer like Brocade. But with the credit markets frozen last fall and people wondering about the economic outlook, borrowing seemed unlikely. (The uncertainty around the economy led the two sides to trim the final purchase price to just $2.6bn in late October; the transaction closed in mid-December.) Beyond the question of financing the pickup, folks questioned the wisdom of a deal that would move the combined company even more directly into competition with Cisco Systems, the most successful networking vendor of the modern era.

That thought certainly spooked investors. As soon as the pairing was announced, Wall Street knocked some 20% off Brocade shares and continued to put pressure on them well into this year. At their lows in early March, Brocade shares had lost some three-quarters of their value since the announcement of the acquisition. (That compares to a 40% decline in the Nasdaq during the same period.) The slide left Brocade in the absurd situation of sporting a market capitalization of just over $800m, despite tracking to generate about $1.9bn in sales in the current fiscal year. It was also a rather damning assessment of the Foundry buy, given that Wall Street was valuing the combined Brocade-Foundry entity at just one-third the amount that Brocade had valued Foundry.

It turns out that the market dramatically undervalued Brocade. Since bottoming out, its shares have quadrupled, giving the vendor a current market capitalization of $3.4bn. That run has left Brocade shares flat over the past year, while the Nasdaq is down some 18% during that time. Brocade has also slightly outperformed rival Cisco over the past year.

Wall Street seems to be digesting the fact that Brocade may actually be able to survive – even thrive – in its fight with Cisco. (For its part, Cisco hasn’t been helping its own cause. Recent actions, including introducing a new server offering, have created more enemies than friends.) Meanwhile, Brocade has integrated Foundry a quarter or two earlier than planned and has been pitching itself as a viable alternative to the giant. Despite a tough beginning, that message is starting to resonate with customers.

MathStar saga gets ‘curiouser and curiouser’

Brenon Daly

-Contact Brenon Daly

As the tender offer for MathStar runs into its final hours ahead of this evening’s expiration, there’s a new twist in the already-twisted saga around this Pink Sheets-listed company. First, a bit of a recap. In early June, hedge fund Tiberius Capital tossed out an unsolicited bid of $1.15 for each share of MathStar, which has been exploring ‘strategic alternatives’ for more than a year. MathStar’s board rejected the initial overture, as it did when Tiberius sweetened the offer earlier this month to $1.25 per share, for a total of $11.5m. When it bumped the bid, Tiberius also said the tender offer expires late tonight. (Of course, it could extend the deadline, as often happens in these cases.)

At this point, however, the deal gets ‘curiouser and curiouser’ (as Alice said when she found herself in Wonderland). We noted late last week that rather than be a seller, MathStar is now planning to be a buyer. The erstwhile fabless semiconductor firm announced that it plans to acquire language-translation vendor Sajan. As expected, the news didn’t go over well with Tiberius, which is also MathStar’s largest shareholder. But the planned purchase also didn’t sit well with the company’s founder and longtime chief executive, Douglas Pihl, who quit in protest.

Given such a vote of no confidence, we looked more closely into MathStar’s proposed buy of Sajan. Although investment bank Craig-Hallum Capital Group is listed as the adviser for MathStar on the deal, we discovered that the transaction actually flows through a different Minneapolis-based investment bank, Feltl and Company.

Not disclosed anywhere publicly is the fact that Feltl has actually worked on deals for both sides of the proposed acquisition, serving as manager for two MathStar offerings over the past three years, and having done placements for the firm before that. Feltl also advised on a placement for Sajan in January 2007. We’re not suggesting anything nefarious about the proposed MathStar-Sajan transaction. But we sought to clarify how it came to be that a vendor with a decade of business in the semiconductor industry came up with the idea – along with Feltl as well as its lawyers and bankers – to use half of its cash holdings to buy its way into a completely different field. No one returned calls.

Software AG looks for a repeat

Brenon Daly

Contact: Brenon Daly, Dennis Callaghan

Having significantly whittled down the debt it picked up acquiring webMethods two years ago, Software AG is now ready to add on a bit more to cover its pending purchase of IDS Scheer. It plans to borrow some $470m and pay that back over the next three years or so. With Software AG’s steady cash generation, that shouldn’t be a problem. (The German company, which also pays a dividend, says it is on track to accumulate some $190m in free cash flow this year.)

In fact, we understand that capital questions hardly figured into the firm’s M&A plans, which it had trumpeted for the better part of two years. Instead, Software AG has simply been waiting for prices to come down. And based on the fact that it paid less than half the valuation for IDS Scheer than it handed over for webMethods, we’d say its patience paid off. (Additionally, it is about half the valuation that IBM paid for ILOG, which boosted Big Blue’s business process management portfolio.)

As a final thought on this week’s transaction, we suspect that if Software AG gets half the return on IDS Scheer that it got on webMethods, it’ll probably be pretty pleased with its new purchase. (Arma Partners advised Software AG on both deals.) WebMethods is now the vendor’s second-largest revenue producer. Moreover, the webMethods business expanded 33% in 2008 – twice the rate of overall revenue growth at Software AG last year.

MathStar’s moves just don’t add up

Brenon Daly

Contact: Brenon Daly

After about a decade in business as a fables semiconductor vendor, MathStar hasn’t been doing much of anything for the past year. We mean that literally. The Pink Sheets-listed company has no ongoing business, no products and, as of Wednesday, no chief executive. However, MathStar nonetheless finds itself the target of several buyout offers. And now, in a fittingly bizarre development, the unwilling seller has turned into a would-be buyer. In a rather curious move, MathStar announced a nonbinding offer Wednesday for a language-translation company called Sajan. (Minneapolis-based investment bank Craig-Hallum Capital Group is advising MathStar on the proposed transaction.)

Even in the murky world of Pink Sheets-listed firms, MathStar’s move stands out as opaque. CEO Douglas Pihl, who also founded the vendor, apparently thought as much. As MathStar announced its play for Sajan, Pihl blasted the proposed acquisition – and then backed that up by resigning his position. Pihl noted in his resignation letter that the planned deal would result in about 50% dilution of existing MathStar shareholders.

The proposed purchase of Sajan also didn’t sit too well with the firm’s largest shareholder, Tiberius Capital, which has been trying to buy MathStar outright for the past month. The Chicago-based fund is currently offering $1.25 for each share of MathStar, or about $11.5m in total. MathStar’s board has repeatedly rejected the bids from Tiberius, just as it shot down the overtures from privately held PureChoice late last year. MathStar announced in May that it would explore strategic alternatives.

Tiberius claims MathStar disclosed the Sajan purchase to create a ‘cloud of hope’ that it could smartly obtain an operating business that would create more value than the proposed sale to Tiberius. (On the other hand, a more cynical assessment of MathStar’s planned transaction would call it a ‘scorched earth’ defense, since the deal would burn up half of the company’s cash.) Whatever the case, the clock is ticking on Tiberius’ bid, which is essentially the only thing that is propping up the penny stock. Tiberius says its tender offer for MathStar expires next Monday.

Is Kana buying time before it gets bought?

Brenon Daly

by Brenon Daly, China Martens

The showdown that has been brewing around Kana Software for months was supposed to come to a head today. Hedge fund KVO Capital Management had been planning to put forward a director for election at the company’s annual meeting, which was originally scheduled for July 15. Instead, Kana pushed the meeting back. Not by a week or two, or even a month, but until December 1. KVO is the largest shareholder in Kana, with some 3.4 million shares, or 8% of the company.

Although Kana has postponed its annual meeting, we can’t help but wonder if the customer service software vendor is merely buying time until it can get bought. That’s certainly what some shareholders have speculated about the company, which trades at just 0.5x revenue. (And we’ve been saying that for nearly three years.) On its own, there’s little to be bullish about at Kana, a money-burning shop that has been relegated to the Bulletin Board since December 2006. But it does have at least one valuable piece to its business: a deep, long-term relationship with IBM. We suspect Big Blue would be the first call Kana would make if it continues to get pushed for a sale.

Of course, IBM has repeatedly said that it doesn’t want to be an application software vendor. (Saying and doing are two different things, however. Several of its largest acquisitions were for straight application vendors, such as Cognos and FileNet.) In any case, the two firms have had an OEM arrangement for the past seven years, and we understand from a source inside Kana that IBM-related sales have exceeded their quota in recent years. Kana has also baked a fair amount of Big Blue software (notably DB2) into its offerings. So integrating the technology wouldn’t be a challenge in this hypothetical pairing. And financially, IBM has plenty of resources to share with Kana, which would be a nice change of pace for the struggling microcap company. Kana has largely lived off equity and debt offerings over the past 12 years, having run up an astounding $4.3bn in accumulated deficit since its founding.

Q2 earnings to shape Q3 M&A

-Contact Thomas Rasmussen, Xiaoyue Ma

Is there a correlation between the equity markets and M&A? Anecdotal evidence sure seems to suggest so. After a hot start to the second quarter for both the stock market and deal flow, tech M&A slowed as the Nasdaq cooled in recent weeks. In fact, spending on deals in June was less than half the level that it was in both April and May. Many would-be buyers now seem to be looking to earnings season – both for a report on second-quarter results and the outlook for the balance of the year – to determine if they’ll be going shopping again. We have heard this throughout the year from companies that have both the means and the desire to shop, but have refrained from any meaningful deals because of the uncertain outlook.

That sentiment was clearly evident when we tallied the results of our June survey of corporate development executives, who are pretty much the only acquirers in today’s market. When we analyzed the findings and separated respondents at large firms from those at smaller ones, almost two-thirds of large buyers predicted they will be more acquisitive in the second half of 2009. This stands in stark contrast to the results of our survey conducted last December, in which large acquirers were significantly more bearish on M&A, with less than one-third of respondents indicating they would do more purchases. We should note that the June survey was done when the Nasdaq was trading at its highest level since last October, while the December survey was done at a significantly more bearish time.

Given that there hasn’t been a raft of negative pre-announcements by tech vendors so far, second-quarter results may well come in somewhat stronger than many expect. In fact, tech bellwethers IBM and Google, up 20% and 30% year-to-date, respectively, will report after the bell Thursday and the overall consensus seems to be positive. Big Blue recently reiterated its fiscal year forecasts of at least $9.20 and $10-$11 in earnings per share for 2009 and 2010, respectively. If the tech earnings season does indeed go smoothly, we would anticipate companies to pick up their pace of acquisitions.

Drawing the line between M&A and the equity markets

Period M&A spending Nasdaq median Nasdaq median % change from prior month
October 2008 $20bn 1,711 N/A
November 2008 $13bn 1,532 -10.47%
December 2008 $7bn 1,531 -0.05%
January 2009 $3bn 1,521 -0.70%
February 2009 $2bn 1,494 -1.72%
March 2009 $4bn 1,444 -3.35%
April 2009 $21bn 1,646 13.97%
May 2009 $17bn 1,731 5.17%
June 2009 $10bn 1,832 5.84%
July 2009 N/A 1,787 -2.45%

Source: The 451 M&A KnowledgeBase and the Nasdaq

What’s the value of advice on the Entrust LBO?

Brenon Daly

Contact: Brenon Daly

The ‘go-shop’ period at Entrust came and went a month ago, but on Friday the security vendor nonetheless got a richer offer in its three-month-old leveraged buyout. The bidder? Thoma Bravo, the same buyout shop that has had an agreement in place since April to acquire Entrust. Originally, Thoma Bravo offered $114m, or $1.85 per Entrust share, but as the company’s shareholders were set last Friday to vote on it, Thoma Bravo bumped up its bid to $124m, or $2 for each Entrust share. The buyout shop says that is its best and final offer for Entrust.

Thoma Bravo topped itself despite having Entrust’s board unanimously back the initial $1.85-per-share bid. The raise also came despite both of the main proxy advising outfits backing the original offer, which valued Entrust at less than 1x sales, on the basis of enterprise value. If shareholders had actually listened to both Glass, Lewis & Co and Proxy Governance Inc, they would have shortchanged themselves $10m. (And shareholders have already suffered enough by holding Entrust, which has basically traded down over the past four years, with only brief interruptions.)

Undoubtedly, the proxy firms will (once again) throw their support behind the new and improved buyout bid ahead of the shareholder vote, which is slated for July 28. But any endorsement sort of strains credibility given that they already backed one deal that the would-be buyer has acknowledged was too cheap.