Category: investment banking

Market imbalance

Brenon Daly

The markets are shrinking. And we’re not just referring to the trillions of dollars of value that have been lost from the New York Stock Exchange and the Nasdaq over the past year. Instead, we’re talking about the actual number of companies on the markets.

Listings rise and fall over the years, as companies go public or get acquired. At least, they do in normal years. But in a year like 2008, with black swans flying across the sky, the number of listings just falls (rather like the prices of the stocks that remain on the exchanges). Already this year, we’ve seen some 62 US publicly traded companies get acquired. On the other side of the ledger, we’ve had fewer than 10 technology IPOs since January. (And don’t look for Metastorm, which filed to go public in mid-May, to debut on the Nasdaq anytime soon. The company pulled its planned offering on Thursday.)

In terms of M&A dollars, as you might guess given the state of the markets, the companies that trade on them have been sharply marked down, as well. While the number of deals has dropped 27%, the value of those deals has plummeted twice that amount (56%). In addition, spending on public company deals has declined even more than the overall tech M&A market, which has sunk about 40% in terms of dollars spent so far this year.

Acquisitions of US public companies

Period Deal volume Deal value
January 1-November 14, 2007 85 $250bn
January 1-November 14, 2008 62 $109bn

Source: The 451 M&A KnowledgeBase

Push-back on the markdown

Brenon Daly

Rather than the current M&A market being a place where buyers and sellers meet on more or less equal footing, current deals clearly show that acquirers have the upper hand (if you’ll forgive the mixed anatomical metaphor). We’ve already noted how some would-be buyers have pushed for ‘recalibrations’ in deal prices and, for the most part, have gotten these discounts.

However, one target isn’t just sitting by for a markdown. I2, which agreed to be acquired by JDA Software Group in mid-August, has told its bargain-minded buyer that it plans to hold to the original terms of the deal. Under those terms, i2’s common shareholders would pocket $14.86 for each share. (There are also payments to satisfy i2 convertible holders, giving the proposed transaction an enterprise value of $346m.)

I2 shares traded close to the bid up until Wednesday, when JDA told i2 it wanted the company to delay its shareholder vote. I2 went ahead and held the meeting as scheduled Thursday, with more than 80% of shareholders voting for the deal. The company says it has done everything it needed to do to close the deal and ‘expects’ JDA to do the same. The market doesn’t share that expectation. Instead, it anticipates that JDA will trim its bid. I2 shares dropped $4 on Wednesday and sank again on Thursday, closing at $9. That’s almost 40% below the original offer price. In case anyone is curious, terms call for a breakup fee of $15m or $20m, depending on the split.

Google and Yahoo break up

-by Thomas Rasmussen

The Department of Justice announced this morning that it would file suit to block the planned advertising pact between Google and Yahoo. Google followed quickly by axing the deal. YHOO is up 8% in mid-day trading while the overall market is down sharply. The Google/Yahoo breakup has sparked renewed hope among shareholders that Microsoft could return to the table. It also opens up the possibility of a long rumored partnership between Time Warner’s AOL and Yahoo.

Less of the same for October M&A

Brenon Daly

With October standing as the worst month for the Dow Jones Industrial Average in more than a decade, we thought we’d see what the market’s rout did to M&A totals. Essentially, October continued the sluggishness that we’ve already seen in the first three quarters of 2008, with M&A falling about one-third from October 2007. (See our full report on Q1-Q3 activity.) And while the drop in dealmaking seems sharp, it pales in comparison to the losses on Wall Street, at least on a relative basis. Consider this: the October declines of the Dow and the Nasdaq (14% and 18%, respectively) account for exactly half of the total losses for both indexes in 2008. Ouch.

Also similar to the first three quarters of the year, big buyers sat out October. Only three transactions valued at more than $1bn were announced last month. (And, we’d be quick to add, one of them – the $2.3bn unsolicited bid for Atmel – has been rejected and, if history is any guide, probably won’t go through.)

Even with the continued bearishness in the M&A markets, the activity in October does offer a glimmer of hope for the return of a vibrant deal economy. At least things didn’t get worse. And if things continue to not get worse, it’s not too much of a stretch to see them starting to get better.

October deal flow

Month Deal volume Deal value Deals worth $1bn+
October 2006 330 $37bn 8 (Google-YouTube, Open Solutions LBO)
October 2007 309 $32bn 5 (Nokia-Navteq; SAP-Business Objects)
October 2008 238 $23bn 3 (CenturyTel-Embarq, unsolicited bid for Atmel)

Source: The 451 M&A KnowledgeBase

Inconsistent currencies

Brenon Daly

Throughout much of the year, the US dollar looked like lightweight paper. A buck basically bought you a loonie (as our northern neighbors call their dollar), and foreign exchange traders were heard shouting jokes about ‘the American peso.’ We noted the weak US dollar as one of the key reasons that total M&A spending by US acquirers dropped by about two-thirds from mid-2007 to mid-2008, while European shopping jumped by one-third (see report).

In the wake of the global financial crisis, however, the dollar has strengthened. To get a sense of that, consider the relative value of the US dollar when two Silicon Valley-based multinational tech giants went on shopping trips to Australia this year. Back when Hewlett-Packard made its play for records management vendor Tower Software in late March, the US dollar bought about A$1.10. A few days ago, when Oracle reached for Haley Limited, $1 bought A$1.60. That’s a lot more buying power for the once-humbled US dollar.

Of ‘corrections’ and ‘recalibrations’

Brenon Daly

Since the beginning of September, a new euphemism has found its way into Wall Street parlance: ‘recalibration.’ It is a close cousin to the original euphemism, ‘correction.’ In fact, the pair of linguistically neutral terms are often popping up in the same sentence, such as ‘Given the market’s correction, we have recalibrated the deal.’ We gather that’s a lot more sensitive than saying, ‘Look, stocks have gone to hell, so we slashed the deal.’

Whatever the language, we saw two cases of this on Wednesday. Not unexpectedly, Brocade ‘amended’ its offer to buy Foundry, originally inked in late July. (‘Did we say $3bn? We meant $2.6bn.’) And Broadcom took a pair of scissors to its agreement to buy AMD’s digital television unit, cutting 25% from the price.

At least the deals will get done (probably). The same can’t be said for a transaction a banker described for us yesterday over coffee. Working on the sell-side, the banker and his client hammered out an agreement with a strategic acquirer over the summer. Terms called for the buyer to pay about $30m, about $25m of that in cash, the rest in equity. As shares in the would-be buyer ‘corrected,’ the company ‘recalibrated’ the price down to about $20m. The final kicker: the company planned to pay in stock. The would-be target is ‘recalibrating’ its interest in the offer.

Ad networks: What recession?

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-by Thomas Rasmussen

Akamai just got serious about online ads. It acquired ad network acerno from i-Behavior last week for $95m in cash. (See my colleague Jim Davis’ report for more on this acquisition.) This marks not just a somewhat drastic change in focus for Akamai, but is also an encouraging sign for the remaining online advertising networks. Despite the current economic meltdown, and more specifically the declining revenue and abysmal forecasts from ad giants Yahoo and Google, everybody seems to want a slice of the multibillion-dollar online advertising market.

Including the Akamai transaction, a total of 23 online advertising deals have been inked this year. That is up more than 25% from 17 deals for all of 2007, and just four in 2006. This increase in M&A activity stands in stark contrast to the overall Internet M&A picture, where the number of deals has declined more than 10%.

Moreover, despite highly publicized warnings from VCs about the decline in available venture capital and possible exits, funding has been flowing freely and rapidly to online advertising startups. Some of the many to receive funding recently include mobile ad firm AdMob, which raised $15.7m last week for a total of $35m raised to date; Turn Inc., which raised $15m recently for a total of $37m; ContextWeb, which raised $26m in July for a total of more than $50m raised; social networking ad network Lotame, which raised $13m in August in a series B round for a total of $23m raised; and Adconion Media Group, which closed a staggering $80m in a series C round in February, bringing its total funding to more than $100m.

With IPO markets closed, these startups should all be considered M&A targets. Adconion in particular stands out because of its international reach and large base of 250 million users, 50 million of whom are in the US. It would be a nice fit for one of the large media conglomerates competing for online advertising dominance. And they have shown that they are not afraid of opening the vault to do so. VC and banker sources say funding is likely to continue for the near term since there is still a lot of buyer interest. It is unlikely to suffer the same fate as the social networking funding fad, because some online advertising companies actually make money. As this segment continues to consolidate over the next year, we suspect deal flow will likely eclipse that of the past 12 months. Mobile and video advertising ventures are likely to lead the next generation of online advertising-focused startups.

Select recent online advertising deals

Announced Acquirer Target Deal value Deal closed
October 15, 2008 Technorati AdEngage Not disclosed October 15, 2008
June 18, 2008 Microsoft Navic Networks $250m (reported) Not disclosed
April 29, 2008 Cox Enterprises Adify $300m May 2008
March 11, 2008 Qualcomm Xiam Technologies $32m March 11, 2008
February 5, 2008 AOL Perfiliate Technologies $125m February 5, 2008
November 7, 2007 AOL Quigo Technologies $346m December 20, 2007
September 4, 2007 Yahoo BlueLithium $300m October 15, 2007
May 18, 2007 Microsoft aQuantive $6.37bn August 13, 2007
May 15, 2007 AOL Third Screen Media $105m May 15, 2007
April 13, 2007 Google DoubleClick $3.1bn March 11, 2008
April 30, 2007 Yahoo Right Media $680m July 12, 2007

Source: The 451 M&A KnowledgeBase

Smoothing the spread

Brenon Daly

With the stock market in turmoil, more than a few deals have seen a gulf widen between the current price of a would-be target and its proposed takeout price. So the question becomes: How to smooth the spread? Well, two different approaches – with wildly different results – seem to support the idea of disclosure, with more being better. Wall Street, apparently, is a little skittish these days.

A month ago, JDA Software took the unusual step of issuing a press release to assure Wall Street that it can actually pay for its PE-style acquisition of i2. Originally, JDA was banking on Wachovia to help fund its purchase. But as that bank came undone, Wells Fargo stepped in to join Credit Suisse as the lenders to JDA. That deal, which was launched in mid-August, goes to i2 shareholders a week from Thursday. Meanwhile, i2 shares are currently changing hands at about $14, compared to JDA’s bid of $14.86.

Contrast that clarity with the cloudy situation surrounding Brocade Communications’ planned purchase of Foundry Networks. When Brocade unveiled its ‘Cisco-killer’ acquisition in July, it said it would pay $18.50 in cash plus a sliver of stock for each Foundry share. The networking equipment maker’s stock traded near the bid until a disastrous decision Friday to delay its shareholder vote on Brocade’s offer, citing ‘recent developments.’

While the company may have had its hands tied about what it could say about these ‘developments,’ the ominous move spooked the market. Concerns immediately arose about Brocade being able to pay for the $3bn acquisition, given the tight credit market, as well as the SAN vendor perhaps knocking down its offer price. Shares are now changing hands at $13.36 – almost exactly where they were before Brocade launched its bid three months ago. We’ll see if the initial offer holds up when Foundry shareholders vote on the deal Wednesday afternoon.

Expensive independence

Brenon Daly

It was a rough week all around for stocks (once again), but the decline was especially galling for holders of shares in companies that had earlier attracted unsolicited offers. Two big would-be targets, neither of which is still being hunted, were in the news again this week: Yahoo and SanDisk. And the news wasn’t good.

Jerry Yang and the rest of the Yahoo-ers (at least the ones who survived the 10% job cuts) revealed that business was a bit soft in the third quarter. Sales were stagnant, and the search engine earned only one-third the amount that it did during the same period last year. So much for their go-it-alone plan. You’ll recall that Yahoo repeatedly brushed aside a $31-per-share offer from Microsoft earlier this year. The stock closed Thursday at $12.65, near its lowest level since mid-2003.

Meanwhile, SanDisk shares also hit a five-and-half-year low after Samsung on Tuesday pulled its $5.85bn unsolicited offer for the flash memory card maker. Samsung aired its offer of $26 for each SanDisk share in September, after several months of unsuccessful overtures. SanDisk shares closed Thursday at $9.14. That means the rejection by SanDisk’s board has cost shareholders more than the rejection by Yahoo’s much-pilloried board, at least on a relative basis. SanDisk shares are changing hands at about 65% below Samsung’s offer, while Yahoo stock is trading ‘only’ 59% below Microsoft’s bid.

Fixed on the market

Brenon Daly

Although the IPO market is closed right now, some VCs are nonetheless steering – and steeling – their portfolio companies for a public market payday. Of course, that often means passing up a trade sale, which holds out the appealing prospect of cash on close. But Menlo Ventures’ John Jarve pointed out in his talk at IBF’s early-stage investment conference that those sales can be shortsighted. Consider the case of portfolio company Cavium Networks.

Jarve says Cavium, which makes security processors for F5 and Cisco, among others, has attracted a number of suitors. One would-be buyer floated a $350m offer for the company. Instead, Cavium went public in May 2007. At its peak, it sported a market capitalization of nearly $1.5bn. Even in the midst of the current Wall Street meltdown, Cavium is still valued at $500m.

The Cavium tale sparked a round of (perhaps apocryphal) Silicon Valley chestnuts about companies that also passed on trade sales to remain independent: Cisco allegedly rejecting an $80m offer from 3Com and Google nixing a reported $1bn bid from Yahoo. One we can add to that list is Riverbed. Several sources have indicated that Cisco made a number of serious approaches to the WAN traffic accelerator, but was rebuffed. Riverbed, which at one point was valued at about $3.5bn, currently trades at a $740m market capitalization.