Category: investment banking

GRC=Get Ready for Consolidation

Brenon Daly

Contact: Brenon Daly

After a pretty thin stretch of deals in the governance, risk and compliance (GRC) market, Thomson Reuters reached for startup Paisley Consulting last week. The deal comes after the two companies partnered for a year, but not in the conventional manner. Rather than the big company reselling the startup’s wares, Paisley actually resold Thomson’s tax and auditing product, Checkpoint. The two companies also had a fair number of joint customers.

We understand that Paisley wasn’t really looking for a deal. Founded in 1995, Paisley is still run – and was majority owned – by its founding husband-and-wife team of Tim and Stacey (née Paisley) Welu. (The pair will continue to run the business after the acquisition.) The Minneapolis–based company took only one round of outside money, a $10m slug in 2003 from Insight Venture Partners. Despite its beginnings, Paisley was no mom-and-pop shop. We understand the company is set to finish 2008 with sales of more than $40m.

The Thomson-Paisley pairing comes after several large software companies, which would be the most conventional buyers of GRC startups, inked deals of their own. Oracle stayed close to home, and grabbed existing GRC partner LogicalApps last year, while SAP made a big play for Virsa Systems in mid-2006. (As a side note on SAP’s move, we would mention that longtime Oracle executive Ray Lane sat on Virsa’s board and helped broker the initial partnership that led to the purchase.)

With Paisley gone, there are still a few high-profile GRC vendors in the market. BWise, which has its roots in the Netherlands, has a strong presence in Europe; OpenPages, which started life as a content management vendor before focusing on GRC; and a company that’s not unlike Paisley, Archer Technologies, which my colleague Paul Roberts recently profiled. We understand that both BWise and Archer, which is about half the size of Paisley, have been talking with potential suitors throughout the year. However, a month ago, Archer sold a 40% stake of the company to Bain Capital Ventures, which likely takes it off the block for now.

M&A ramp-up for Facebook?

-Contact Thomas Rasmussen

Facebook’s rumored offer for micro-blogging site Twitter had the Web all atwitter recently. The $500m bid was reportedly rejected because it came in the form of a stock swap, with Facebook inflated to the infamous $15bn valuation that the social network got in Microsoft’s investment a year ago. Judging from our talks with insiders throughout the year, everyone knows this is a ludicrous valuation. Still, we wonder why some people – including big media – are still bandying this around, and more to the point, why Facebook thought Twitter would buy into the valuation. (More realistically, bringing the valuation down to earth, the offer amounts to $100-130m.) Nevertheless, the rumored run at Twitter confirms our speculation in June that Facebook, which has hardly ever dabbled in M&A, is gearing up to go on a substantive shopping spree. If that’s the case, it could do a whole lot worse than roping in Loopt.

When we first reported on this possibility, we had heard that initial talks were under way. However, the less-than-stellar adoption of the overhyped location-based services (LBS) applications probably put a damper on the enthusiasm. Nonetheless, recent developments have made LBS an attractive area again: Android devices have hit the market, the iPhone continues to sell well and Nokia is rolling out its own sleek new smartphone. Granted, the degree to which people are interested in having friends and family track their every move is debatable. But for Facebook and other social networks, which essentially base their entire business models on our instinct to pry into each other’s business, adding Loopt’s service to its currently static desktop and mobile offering is a no-brainer. And if Facebook was willing to hand over north of $100m to acquire Twitter, spending the same amount on Loopt, which is roughly where we pencil out its valuation, would make a lot more sense.

Social network M&A, 2006-2008

Period Number of deals Total known deal value
2008 YTD 32 $98.3m
2007 12 $149.7m
2006 8 $31.1m

Source: The 451 M&A KnowledgeBase

Thain’s thin fees

Brenon Daly

Contact: Brenon Daly

In the combination of Merrill Lynch and Bank of America, it’s all over but the shouting. The banks held separate shareholder meetings Friday to take the pending deal to their respective shareholder bases, with both sides approving it. (Originally valued at some $50bn, the slump in shares of Bank of America has cut the final price of the all-equity transaction to less than half that amount.) The deal will officially close before year-end.

While all that seems straightforward enough, the shouting is coming from a showdown over (what else?) money. Specifically, the insistence by Merrill Lynch CEO John Thain that he’s due a $10m bonus for his work over the past year. We’ll leave the debate on ‘Wall Street greed’ to Lou Dobbs and others, and, similarly, will pass on offering thoughts on whether the bonus would make Thain overpaid or not. However, we would note that a $10m advisory fee for a $21bn deal is hardly exorbitant, as any banker would tell you.

Select 2008 deals for Merrill Lynch and Bank of America

Date Acquirer Target Deal value
October 2008 ebay (Merrill Lynch) Bill Me Later $945m
October 2008 Hewlett-Packard LeftHand Networks (Merrill Lynch) $360m
July 2008 Brocade Communications Systems (Bank of America) Foundry Networks (Merrill Lynch) $2.6bn
April 2008 Blue Coat Systems (Merrill Lynch) Packeteer $268m
March 2008 BMC Software (Merrill Lynch) BladeLogic $800m
January 2008 Microsoft FAST Search & Transfer (Merrill Lynch) $1.2bn

Source: The 451 M&A KnowledgeBase

Actuate: A bit or the whole thing?

Brenon Daly

Contact: Brenon Daly

It turns out that Actuate may have some competition for its own stock. A month ago, the enterprise reporting veteran announced plans to buy back some $60m worth of its own equity, at $3.15-3.40 per share (Jefferies & Co. is running the process). Under those terms, the buyback would have removed up to 19 million shares from a base of about 65.5 million.

However, since Actuate revealed the tender offer on November 5, the markets have continued to plummet, with the Nasdaq slumping almost 20%. Accordingly, Actuate trimmed the price it was willing to pay for its own shares to $2.20-2.60 each. On Thursday, it bumped up the range to $3.00-3.50. What prompted the boost? Was it a holiday gift from the company to its shareholders, who have seen their stock drop nearly 70% over the past year?

As it happens, Actuate raised the price of the planned buyback because an unnamed party offered $3.50 per share for the whole company. Actuate’s board said the unsolicited proposal, which would value the company at nearly $230m, is not in shareholders’ ‘best interests.’ While it’s uncertain how the mysterious unsolicited offer and the tender offer will play out, it seems pretty clear that one way or another, some Actuate shares are going to come off the board.

Corporate dealmaking

Brenon Daly

Contact: Brenon Daly

Since our annual survey of corporate development executives is currently being filled out by those dealmakers, we thought we’d take a quick look at business there. (Note: If you are a corporate development officer and would like to take part in our survey, please email me and I will send you a copy. Those who participate will get a full look at the results, plus additional comparisons with the previous year’s findings. See that report here.)

At first glance, corporate spending looks pretty healthy, roughly matching the levels of the previous three years. (For our purposes, we searched our M&A KnowledgeBase for acquisitions announced this year by companies that trade on the Nasdaq or NYSE.) Our first observation is that US companies are pretty much the only ones doing any shopping. Their spending accounts for three-quarters of all tech M&A spending that we’ve tracked this year, compared to about half of the total in each of the past two years.

However, we would quickly add that (not surprisingly) deal flow has been drying up as the year has gone along. In the third quarter, the total value of acquisitions by US publicly traded acquirers hit just $16bn, down from $144bn in the second quarter and $38bn in the first quarter (second-quarter results were inflated because the four largest deals of the year, including three mammoth communications transactions, were announced in the summer). In the next week, we’ll tally what corporate development executives predict for 2009 and have a report on that.

Acquisitions by US listed companies

Period Deal volume Deal value
January-November 2005 945 $204bn
January-November 2006 1,084 $251bn
January-November 2007 961 $193bn
January-November 2008 793 $218bn

Source: The 451 M&A KnowledgeBase

Bargains for holiday shopping

Brenon Daly

Contact Brenon Daly

As we flip the calendar for the final month of 2008, we had to check that we weren’t in fact mistakenly looking at 2005’s calendar, at least in terms of M&A. That’s because deal flow this year is looking a lot like it did three years ago. So far, we’ve seen some 2,687 deals with an announced value of $286bn, compared to 2,761 deals worth $336bn during the same period of 2005. Compared to last year, spending is down some 37%.

As for what we might expect from financial and strategic shoppers in the final month of 2008, we think they’ll be mirroring retail shoppers. In other words, they’ll be looking for bargains. (We would point to the unprecedented ‘door-buster’ markdowns that sellers used to lure shoppers over the Black Friday weekend.) Already, we’ve seen the price tag of an average tech deal shrink to $106m this year. That’s down from an average of $134m in 2007 and $122m in 2005. Granted, this is a raw figure of all tech spending divided by the number of deals. But the direction of the aggregate number each year is telling.

Year-to-date tech M&A

Period Deal volume Deal value
January-November 2004 1,871 $151bn
January-November 2005 2,761 $336bn
January-November 2006 3,693 $428bn
January-November 2007 3,384 $455bn
January-November 2008 2,687 $286bn

Source: The 451 M&A KnowledgeBase

‘Lighter’ M&A at Nuance

Brenon Daly

Since former rivals Nuance Communications and Scansoft welded themselves together three years ago, the combined company has been shopping at a furious rate. In 2007, the speech-recognition vendor inked seven acquisitions. So far this year, it has spent some $640m on three acquisitions. (That doesn’t count an unsolicited offer for Zi Corp.) The company has used its purchases to focus on specific products for the healthcare market, bolster its mobile offering and expand into Europe.

However, don’t expect Nuance to continue shopping. The company told Wall Street on Monday that its current fiscal year will be ‘lighter’ in terms of M&A, with small deals serving narrow focuses. Cash will be currency for any purchase, since Nuance said it is ‘unlikely’ to use equity in a deal and the debt market is currently closed.

Nuance generated some $196m in cash from operations in the just-completed fiscal year, and had $262m in cash and equivalents at the end of September. However, it also carts around $895m in long-term debt going back to its earlier shopping spree, which has attracted a number of bears to Nuance. At various points over the past year, investors have sold as many as 35 million shares of Nuance short. That’s roughly equivalent to the amount of Nuance shares that typically change hands in more than 10 days of trading, although the number of shares sold short has been declining in recent months.

Extended hours at boutiques

-Contact Thomas Rasmussen

Results from our fourth annual Tech Banking Outlook Survey earlier this week showed that bankers are turning bearish. Delving further into the data, we took a look at how it breaks out among banks of various sizes. When asked about the average time to closing a transaction, bankers said the length had trended up by less than a quarter of a month. Hardly a significant slip. Nonetheless, what struck us was that respondents who identified themselves as belonging to smaller shops (1-14 principals) showed an increase in time to close over last year of about a half-month to an average of 8.2 months. This compares to larger banks (25+ principals) reporting an average closing time of 7.6 months or very large banks (50+ principals) reporting an average closing time of 7.3 months.

Anecdotally, we’ve heard about deals dragging on for some time. (Two recent deals, for instance, took more than two years to close, bankers from two different boutiques recently lamented.) Obviously, the delays are mostly due to the uncertain economic outlook among acquirers, who have virtually all of the leverage in negotiations these days because they are the only exit available to startups. Indeed, bankers cited the cloudy picture at tech companies as the main reason that deal flow will be down next year.

And deals could lag even more next year. The reason? Broadly speaking, terms for the transactions closed so far this year were set before the October meltdown on Wall Street. We’ve already seen the upheaval in the credit market force recalibrations in the purchase prices of several acquisitions, including Brocade’s big pickup of Foundry. Those price cuts, which typically involve bumping back shareholder votes, string out deals. And every day that deals don’t close, the market seems to weaken. The Nasdaq, having dropped 25% in the past month alone, is currently at a six-year low. Since buyers are acutely aware of that decline, they’re increasingly going to be looking for a discount on what they plan to purchase. With every bid and counterbid, the deal cycle lengthens.

LBOs without the ‘L’

Brenon Daly

In the current economy, all debt is suspect. That’s one of the main reasons we’ve seen the value of private equity-backed deals plummet by 84% to just $26bn. (For context, that’s just half the level ($56bn) we saw for all of 2005, before the buyout barons really get swinging.) And, according to senior bankers in our just-released Tech Banking Outlook Survey, the leveraged buyout (LBO) market isn’t expected to pick up in 2009.

More than twice as many bankers expect the dollar value of their work with PE shops to decline next year, compared to those who expect it to rise (57% anticipate a decline while only 22% predict an increase). That’s a dramatic shift from last year, when more bankers projected an uptick of LBOs in the coming year than those who saw the business slide (44% expected an increase while 37% saw a decline).

As for the frozen credit market, some PE firms are not even bothering to look there for financing. Several financial sources have told us recently that LBOs are being penciled out with buyout firms covering half the purchase in equity. In some cases, they’re planning to use all equity. Again, that’s a dramatic shift from recent years, when PE firms covered just 20% or so of the purchase in equity.

To some degree that makes sense, given that they are sitting on billions in cash while banks are very reluctant to dole out any of their funds. Still, it means we may have to erase the ‘L’ from LBO, or at least qualify future financial deals as ‘LLBOs’, as in ‘less-leveraged buyouts.’ It’s yet another sign of the times.

Projected change in dollar value of PE mandates in coming year

Year Percentage that expect increase Remain the same Decrease
2007 (for 2008) 44% 19% 37%
2008 (for 2009) 22% 21% 57%

Source: The 451 Tech Banking Outlook Survey, November 2008

Dealing with a legacy

Brenon Daly

Justly or not, acquisitions go a long way toward shaping a CEO’s legacy. (If you don’t believe us, just ask Jerry Levin, who sold Time Inc for what turned out to be a pile of wampum, in the form of overinflated AOL equity.) With Monday’s announcements that two major tech CEOs are on their way out, we pause to look at how deals – or lack of deals – will shape their respective legacies.

Let’s start with Symantec’s John Thompson, who will leave the storage and security giant by the end of its current fiscal year next April. Under his nearly decade-long leadership, Symantec shares rose some 500%, compared to a flat performance over the same period in shares of rival McAfee and a 40% decline in the Nasdaq. However, the one blemish on his record is Symantec’s largest-ever deal, its $13.5bn purchase of Veritas. (Thompson guided Symantec through more than 40 other acquisitions during his tenure.) Symantec shares peaked at about the time the company announced the deal, and have given back most of the gains they had piled up since mid-2003.

And then there’s Yahoo’s once-and-future king, Jerry Yang. We’re guessing history will be less kind to the man who turned down Microsoft’s offer of at least $31 for each share of Yahoo. Shares of the foundering search giant briefly dipped into the single digits earlier this month. However, they jumped almost 10% on Tuesday as Wall Street applauded the imminent departure of Yang, who has overseen the incineration of some $20bn of shareholder value since he reassumed the top spot at Yahoo in June 2007.

Aside from the ‘relief rally’ for Yang’s move, Yahoo shares also got a boost from speculation that the turnover in the corner office makes a deal with Microsoft more likely. We have our doubts about that. Instead, we’d focus on what the CEO change at Symantec means for deal activity. Our bet: Incoming CEO Enrique Salem will unwind several large chunks of the Veritas business, perhaps starting with NetBackup. As recently as last summer, Thompson said ‘nothing’ from the under-performing Veritas portfolio was for sale. Salem will set the company’s line on that in the future, and we wouldn’t be surprised to see NetBackup or other storage assets find their way onto the block.