Category: investment banking

Interplay between M&A and IPO

Brenon Daly

Contact: Brenon Daly

With the IPO calendar essentially blank right now – and likely to stay that way as long as the Nasdaq keeps lurching downward – companies that are both of size and mind to go public are using the pause to do a little shopping of their own. These transactions tend to be smaller plays, typically rounding out the company’s existing portfolio. (We would contrast these tuck-in deals with the larger consolidation plays that companies make so they can get big enough to paper their S-1. Of course, those deals only work when the public market is receptive. For instance, Convio acquired a rival that was about half its size in hopes of bulking up and going public. It pulled its IPO paperwork last August.)

Last summer, we noted that NetQos inked a small buy on its way to what we expect will be a larger sale of its equity to the public, whenever the market returns (it was the first deal by the network performance management vendor in some two-and-a-half years). In a similar situation, Tangoe last week announced that it was picking up mobile device management startup InterNoded.

The deal, which was Tangoe’s third purchase in less than two years, certainly wasn’t done to boost revenue. InterNoded posted sales of about $4m in 2008; meanwhile, Tangoe is anticipating about $60m in 2009. Tangoe has raised some $20m in VC, along with an undisclosed slug of debt. But the company, which is running in the black, doesn’t appear to have any immediate plans to raise capital (even if that were possible right now). We understand that it hasn’t met with bankers, much less held a bake-off.

Quest shops again, virtually

Brenon Daly

Contact: Simon Robinson, Brenon Daly

A year after closing a deal with Vizioncore that got Quest Software into the storage virtualization market, the company went shopping again this week. The systems management company picked up some of the assets of venture-backed MonoSphere, most notably its Storage Horizon product. This is a storage analysis and reporting tool designed to help storage managers assess the capacity optimization of their existing multivendor arrays so they can reclaim unused capacity and project future requirements more accurately. Storage Horizon will slot into Quest’s portfolio for managing storage in virtualized server environments, which is currently sold under the vOptimizer Pro brand.

As part of Quest, MonoSphere may well have the opportunity to deliver on the promise of its technology. (It was that potential that attracted some $41m in backing from Intel Capital, ComVentures and Lightspeed Venture Partners.) On its own, MonoSphere didn’t have much to show for itself. That’s a familiar story concerning other storage-reporting specialists, which often find that large enterprises are hesitant to buy such tools from small vendors, especially when their existing suppliers are happy to offer similar functionality for little or no cost. But with Quest, which counts more than 100,000 customers and expects to report some $730m in 2008 revenue, MonoSphere may be able to land customers that had previously slipped through its hands.

Polishing off Aladdin

Brenon Daly

Contact: Brenon Daly

After almost five months of sometimes-heated negotiations, buyout shop Vector Capital and Aladdin Knowledge Systems have agreed to take the authentication vendor private. The accord comes after two formal price adjustments (one up, one down) that left the final deal valued at $160m. Vector plans to slot Aladdin into SafeNet, which it acquired in March 2007 for $634m.

Vector’s two security purchases stand in sharp contrast to each other, since the SafeNet transaction went through with a minimum of histrionics. Consider that SafeNet took just five weeks to close, compared to the drawn-out battle for Aladdin, which included the threat of a proxy fight. Part of that may be explained by the relative valuation of the two deals. Vector paid about 2x trailing 12-month sales for SafeNet, twice the multiple it is paying for Aladdin. That discount compares to a roughly 40% slump in the Nasdaq during the time between the two acquisitions.

Dell’s deals

Brenon Daly

Contact: Brenon Daly

Dell picked up one services company last week, even as rumors were swirling that the company might be eyeing another, larger services deal. Dell said Friday that it would hand over $12m in stock to acquire four divisions from Allin Corp, an IT consulting shop that trades on the Nasdaq’s bulletin board. Allin, which is profitable, reported revenue of some $22m for the first three months of 2008.

The asset buy from Allin was Dell’s first acquisition in almost a year, following last February’s $155m purchase of MessageOne. However, rather than the Allin deal, the talk last week about Dell’s M&A was more focused on reports of whether the company is planning a play for storage-consulting firm GlassHouse Technologies. That company filed an S1 a little more than a year ago, but has only amended it once since then. GlassHouse was looking to raise $100m in the offering, which was slated to be led by Goldman Sachs.

While Dell has been active in building out its services portfolio through acquisitions (notably, Everdream and SilverBack Technologies in 2007), we would note that the company might face some difficulties in preserving impartiality at an independent GlassHouse if it were to pick up the storage consultant. The reason? Dell might be interested in pushing its own EqualLogic gear, which it bought in November 2007 for $1.4bn (which stands as the company’s largest-ever deal). Speaking of EqualLogic, there are a number of common threads that tie it to GlassHouse. Both companies are based in the Northeast, have nearly 30% of their equity owned by venture firm Sigma Partners and tapped Goldman to lead their offerings.

Recent Dell acquisitions

Date Company Deal value
January 2009 Allin Corp (assets) $12m
February 2008 MessageOne $155m
December 2007 The Networked Storage Company $31m
November 2007 Everdream Not disclosed
November 2007 EqualLogic $1.4bn

Source: The 451 M&A KnowledgeBase

Hey, big spender?

Brenon Daly

Contact: Brenon Daly

Given all the economic uncertainty, companies have made it clear that they’re not in the market for any big deals. (In our annual survey of corporate development officials, they indicated that they were least likely to pursue ‘transformative’ deals in 2009.) To put some numbers around that sentiment, we contrasted the shopping tab of four well-known tech companies in 2008 with the previous year’s tally.

The quartet we selected (IBM, SAP, Microsoft and Nokia) all announced the largest deals in their respective histories in 2007 so we naturally expected some drop-off in spending. But we were amazed at the steepness of the plunge. In 2007, the four companies announced 40 transactions with an aggregate value of $29.2bn. Last year, that dropped to 34 deals worth a paltry $4.7bn. (In fact, each of the firms inked a single transaction in 2007 that was worth more than 2008’s collective total.) And it’s not like they don’t have the resources to continue shopping. Over the past four quarters, IBM, SAP, Microsoft and Nokia have collectively generated an astounding $45bn in cash-flow operations.

Companies go bargain-hunting

Brenon Daly

Contact: Brenon Daly

It’s a buyer’s market in tech M&A right now, and the buyers are saying they want to do deals but don’t want to pay much. That’s the takeaway from our annual survey of corporate development officials. (We’ll have a full report on the results in tonight’s 451 Group send-out.) Half of the respondents said the M&A climate would get ‘somewhat better’ for them in 2009, with another one-quarter saying it would get ‘significantly better.’

The percentage this year (75%) compares to less than half (43%) who predicted last year that the environment would improve. More than four out of 10 corporate development officials projected that the pace of their company’s dealmaking would pick up in 2009, with three out of 10 saying it would stay the same. As to what will make the environment better for them this year, the short answer is that they don’t expect to pay much. Some 45% said valuations of VC-backed companies would ‘decline substantially,’ with another 42% predicting that valuations would ‘decline somewhat.’ That’s nearly three times as many respondents who projected any decline in startup valuations in 2007. Again, we’ll have a full report on the survey tonight.

Outlook for corporate buyers

Year Improve Unchanged Worsen
2008 (for 2009) 75% 13% 12%
2007 (for 2008) 43% 35% 22%

Source: The 451 Corporate Development Outlook Survey, December 2008

Where did you go, LBO?

Brenon Daly

Contact: Brenon Daly

We finished counting all of the nickels and dimes from last year’s M&A spending and, as expected, we’re looking at a rather paltry total. Overall, acquirers across the globe announced tech deals worth $302bn in 2008, down 30% from the total in 2007. (We explore the reasons for the decline – and what it will mean for dealmaking this year – more fully in our 2009 M&A Outlook.)

Perhaps the most interesting point about M&A last year, which goes a long way toward explaining the one-third decline, is the fact that we saw a sharp contrast in the dealmaking activity of strategic and financial acquirers. For the most part, corporate shoppers continued to buy, with the number of dollars spent dropping ‘just’ 12% from the previous year.

On the other hand, PE shops slashed their dealmaking by 77%, spending roughly the same amount on tech LBOs last year that they did in 2004. And given the state of the current credit market – along with some of the painfully ill-advised bets they made on portfolio companies when the markets were smiling – we can’t imagine that situation will unwind enough to spur much activity in tech LBOs in 2009. Indeed, nearly nine out of 10 corporate development officers we surveyed in mid-December said they expected even less ‘competition’ in deals from PE firms this year.

Annual deal flow

Year Strategic acquisitions Financial acquisitions Total
2008 $275bn $27bn $302bn
2007 $314bn $118bn $432bn
2006 $359bn $98bn $457bn

Source: The 451 M&A KnowledgeBase

Intersil: Doubling down in Austin

Brenon Daly

Contact: Brenon Daly

Intersil’s purchase of Zilker Labs last week had more than a few echoes of its pickup of D2Audio last July: same buyer, same banker, same backyard and even a shared backer at the acquired company. Both Zilker Labs and D2Audio are based in Austin and drew venture money from Dallas-based Sevin Rosen. (We understand that Al Schuele, Sevin Rosen’s lone VC in Austin, participated in funding both companies.) On the exit, boutique firm Pagemill Partners advised both Zilker Labs and D2Audio.

Despite the similarities between the exits of Zilker Labs and D2Audio, the companies had virtually nothing to do with each other up until that point. D2Audio makes digital audio power amplifiers, and primarily serves the consumer market. We estimate that Intersil paid around $25m for D2Audio. Intersil’s more-recent purchase of Zilker Labs added power-management technology to its existing portfolio. We estimate that Intersil paid about $18m for Zilker Labs, which raised some $33m in backing.

Intersil’s 2008 acquisitions

Date Target Target’s headquarters
December 18, 2008 Zilker Labs Austin
September 30, 2008 Kenet Woburn, Massachusetts
July 28, 2008 D2Audio Austin

Source: The 451 M&A KnowledgeBase

CA back in M&A

Brenon Daly

Contact: Brenon Daly

It turns out that there is some shopping going on out on Long Island, after all. Back in September, we noted that CA Inc had been out of the market for two years and that some bankers weren’t ‘bothering with the trip’ out to the company’s headquarters. (On a recent call with CA’s corporate development team, which has added four members since the start of the year, one participant good-naturedly tweaked us that he had to end our call to catch a meeting a meeting with a banker.)

Since our original piece, the company has done a lot more than just meet with bankers or ‘book read.’ It has closed three deals and has others in ‘various stages.’ (One note about the M&A pause: CA skipped a period of high-priced deals, and will undoubtedly find that it will get more bang for its buck in the current environment and into next year. In our recent survey of corporate development officials, nine out of 10 said private company valuations are going to come down in 2009.)

The return to shopping is part of CA’s announced intent to add 1-2% of revenue through acquisitions over the year. (On a current $4.1bn revenue base, that works out to $40-$80m of sales at acquired companies.) CA will likely be talking about that – along with other financial matters – during its annual meeting with Wall Street analysts on Friday.

CA’s return to the market

Date Target Target sector
November 13, 2008 Eurekify Identity & access management
October 15, 2008 Optinuity Infrastructure management
October 7, 2008 IDFocus Identity & access management

Source: The 451 M&A KnowledgeBase

Online video: boom and bust

-Contact Thomas Rasmussen

The over-hyped world of online video is going through massive turmoil at the moment. While most investors and companies agree that online video is likely the future of broadcasting, no one has been able to make any money from it so far. And it’s likely to get even harder due to tighter venture funding, the closed IPO window and next-generation Web 2.0 entrants such as Hulu and even Apple’s iTunes. These factors have left the online video players scrambling toward any exit, no matter how cheap.

Consider the case of CinemaNow, which was picked up by Sonic Solutions for a mere $3m last month. The portal never managed to turn a profit and had estimated revenue of less than $4m. Yet it secured five rounds of funding (totaling more than $40m) and brokered partnerships with major studios, VCs and strategic investors. When CinemaNow went to investors begging for another round a few months ago, it found that there was no money to be had and a quick exit became the only alternative. That’s a common occurrence these days, and may well have driven rival MovieLink to sell for a paltry $6.6m to Blockbuster last year. (Expect more of these types of deals next year. According to corporate development executives who completed our annual M&A outlook survey, lack of access to VC will be the major catalyst for deal flow in 2009.)

If this sounds eerily familiar, it’s because a similar situation played out during the music industry’s awkward and reluctant switch to digital a few years ago. Several startups, even major ones backed by large studios, tried to become the distributor of choice. Yet, many of those went away in scrap sales or had the plug pulled on them (Viacom’s Urge, Napster and Yahoo’s music service, to name just a few high-profile failures). We’re now left with just a handful of dominant distributors: iTunes, RealNetworks’ Rhapsody, Amazon and, to an increasing extent, MySpace’s heavily funded music effort. Many of these companies are likely to also dominate online video. In fact, add in Google and Microsoft, and you have a list of the companies that are likely to be buyers for the few remaining online video startups.

Recent online video M&A

Year Number of deals
2008 12
2007 10
2006 5

Source: The 451 M&A KnowledgeBase