Category: investment banking

M&A goes MIA in Q2

Brenon Daly1 Comment

With the second quarter wrapped up, we’ve been busy tallying the deal flow from the period. As you might guess, M&A levels for the past three months mirror the dour economic climate. The quick numbers: Overall tech M&A fell 40% in the second quarter, year-over-year, dragged down by private equity players that have been knocked out of the market by the credit market turmoil. The total shopping bill of $148bn is a sharp decline from the $241bn in the same period last year, putting it only slightly above the $122bn recorded in the second quarter of 2006.

A number of trends shaped M&A in the quarter, including the continued use of bear hugs to pressure reluctant sellers, the frozen IPO market and the rise of consolidation deals. Of course, the single largest crimp on deal-making in the second quarter was the utter disappearance of tech buyouts. The value of tech LBOs in the second quarter fell more than 90% compared to the same period last year, when credit was flowing freely. In the just-completed quarter, we recorded some $7bn worth of tech buyouts, down from $85bn in the year-ago period. Looked at another way, LBOs accounted for just 5% of all tech M&A spending in the second quarter, after representing a full one-third of total spending in the same period last year.

Deal flow breakdown

Quarter PE deal value Corp. deal value Total deal value
Q2 2006 $13bn $109bn $122bn
Q2 2007 $85bn $156bn $241bn
Q2 2008 $7bn $141bn $148bn

Source: The 451 M&A KnowledgeBase

Bear market mauls debutants

Brenon Daly

The talking heads at the Nasdaq and the New York Stock Exchange generally define a bear market as a 20% decline from the index’s highs. And, as anyone who picked up a weekend newspaper knows, the markets have officially slumped into bear territory since peaking last fall.

Of course, an index is made up of individual stocks, with some getting more roughed up than others. Oracle has basically traded flat since the Nasdaq meltdown began last October; Microsoft has matched the index’s decline; and VMware has been hammered, plunging nearly three times the Nasdaq decline over the same period. (Another way to look at the meltdown in shares of VMware: At its peak, VMware stock was worth roughly the same amount as a barrel of oil at current prices. Now, you’d have to pony up nearly three shares of VMware to trade for that same barrel of oil.)

With investors not willing to take a chance on shares of existing companies, what chance do the shares of largely unknown and entirely untested IPO candidates have? The short answer is ‘zilch.’ Actually, it’s somewhat of an academic question as there hasn’t been a VC-backed IPO since ArcSight floated on the Nasdaq four months ago. (As we’ve written in the past, we wouldn’t be surprised to see ArcSight get gobbled up, with Hewlett-Packard a logical buyer, in our view.)

With the IPO window closed, corporate acquirers have even more leverage in negotiations. (In other words, don’t expect transactions going off at a double-digit price-to-sales multiple, like IPO candidate EqualLogic got from Dell last November.) We’ve already seen Initiate Systems scrap its proposed offering and go hat-in-hand to a gaggle of investors. Meanwhile, a handful of other S-1s from other companies are gathering dust at the SEC. And we hardly expect any movement during the third quarter. Given the parched IPO market and corporate acquirers in the doldrums, it’s going to be a long, hot summer for a few of these IPO candidates.

VeriSign’s yo-yo diet

Brenon Daly

We’ve noted several times in the past that former binge eater VeriSign has set itself on a fairly severe corporate diet. (Last November, we outlined VeriSign’s divestiture plan that could trim up to one-third of the company’s revenue.) Having already sold off three businesses so far in 2008, VeriSign is nearing a fourth divestiture, we hear.

At the America’s Growth Capital security conference in early April, we heard hallway chatter that VeriSign was deep into talks with a networking equipment vendor and a services shop about selling its managed security service provider (MSSP) business. Now, a source indicates that VeriSign has a letter of intent signed to shed its MSSP business. The acquirer isn’t immediately known, but we hear it’s a strategic, rather than financial, buyer. Given the recent moves by telcos to buy security service shops – for instance, Verizon Business’ purchase of Cybertrust a year ago and BT Group’s acquisition of Counterpane Internet Security in October 2006 – we could also imagine a phone company adding the MSSP business to its service offering.

Like any divorce, a divestiture tends to take longer and be more expensive than any of the parties imagined at the start. And we can only guess at the discount for VeriSign’s MSSP business. The divestiture would effectively unwind its $140m cash-and-stock acquisition of Guardent in December 2003. Ironically, VeriSign inked the Guardent purchase at a time when it was also dieting, having shed its domain name-registry business and other assets. Is this the corporate equivalent of yo-yo dieting? 

Coming and going at VeriSign

Year Acquisitions Divestitures
YTD 2008 0 3
2007 0 1
2006 8 1
2005 7 1

Source: The 451 M&A KnowledgeBase

SanDisk amps up its music player offerings

With its $6.5m tuck-in acquisition of MusicGremlin last week, SanDisk is bulking up its digital music player business. MusicGremlin, with just eight employees and about $5m in revenue, will obviously not have a material effect on SanDisk’s business. Nonetheless, the importance is not so much the size or scope of the company, but more the technology it has developed during its four years in operation. Specifically, MusicGremlin gives SanDisk the ability to effectively stream music wirelessly to its products. We have learned that SanDisk was very eager to acquire the startup, with the large company initiating talks and sealing a deal within a few weeks. Given SanDisk’s recent effort to build its product offerings through strategic acquisitions, what other acquisitions might the company be considering?

From our perspective, SanDisk needs to do some shopping. It currently ranks a distant second place to Apple in the digital music player market, but also faces stiff competition from the likes of Microsoft, Sony and Panasonic. Perhaps the biggest hole in SanDisk’s offerings is the lack of an in-house music and video content provider, like Apple has with its iTunes and Microsoft has with its Zune Marketplace. To date, SanDisk has relied exclusively on partnerships, but learned the downside of that strategy the hard way in February, when Yahoo suddenly shuttered its Music Unlimited service. The disappearance of the service, which was the very foundation of SanDisk’s Sansa Connect player, left users understandably sour.

As to where SanDisk might look for a music service, two names come to mind: Rhapsody (owned by RealNetworks) and Napster. Despite taking in about $150m and $130m last year, respectively, both are consistently running at a loss. Clearly they could be had for a steal. More importantly, they are both proven and established music services with mobile offerings that would make integrating MusicGremlin’s technology an easy task. Using Napster as a comparable, we believe either company can be had for just under $100m, representing a 40% premium over Napster’s current price on Nasdaq. With $1.22bn in cash and a market cap of $5.2bn, SanDisk could certainly afford a few deals to shore up its defenses for the inevitable battle of the titans.

Loopt scores at Apple’s WWDC

1 Comment

As Apple’s Worldwide Developers Conference winds down, the hype for the new iPhone is only beginning. Amid all the hoopla, though, we couldn’t help but make an observation about not so much what was in Steve Job’s all-important keynote, but what wasn’t. Specifically, Kleiner Perkins Caufield & Byers’ much-touted iFund was only mentioned in passing, and none of the surprisingly few ventures were highlighted. (KPCB has written checks to just three companies, out of thousands of applicants.) In fact, a major competitor of iFund’s location-aware application Whrrl, Loopt, was a highlight of the keynote. This comes as somewhat of a surprise after Palego’s Jeff Holden and KPCB partner Matt Murphy spoke highly of their relationship with Apple in a May 27 BusinessWeek article and even speculated on the chances of being a featured app. This led many to believe they were a shoe-in for the keynote. Given Apple’s obsessive demand for radio silence prior to the event, perhaps loose lips do indeed sink ships.

Loopt is funded by KPCB competitors New Enterprise Associates and Sequoia Capital to the tune of $15m. It has a few hundred thousand paying customers, but more importantly, it is the leader in the mobile location-aware-social-networking space spanning several carriers and operating systems. This is a market that has seen a lot of interest from the likes of Google, AOL, Microsoft and even Facebook. In the aftermath of the conference, whispers and rumors of potential acquirers of this little app are all over the place.

Since Google let Plaxo go to Comcast and has failed with its in-house development (Orkut), the search engine has been itching to make headway in the sector through acquisitions. Given Google’s huge push into the mobile space, it is seen as a likely acquirer. However, we think the most probable acquirer is Facebook. The soaring social networking site has been serious about pushing into mobile-social-networking, and a pairing of Facebook’s mobile application with Loopt seems a perfect fit. Since valuations in the social networking space are like something out of the bubble era, it is not unrealistic to see a price tag of just south of $100m for Loopt, a 40-employee startup. With healthy cash reserves and an estimated $400m in revenue for 2008, Facebook has the resources. In fact, though this would only be its second acquisition, we understand Facebook has been gearing up to make more acquisitions in the coming year. If indeed Loopt is taken off the block, rivals Palego, Zyb, and Buzzd may follow in quick order.

Traditional social networking acquisition deals for more than $50m

Announced Acquirer Target Deal Value
May 14, 2008 Comcast Plaxo $160m*
March 13, 2008 AOL Bebo $850m
March 4, 2008 Demand Media Pluck $67m*
May 30, 2007 eBay StumbleUpon $75m
July 18, 2005 News Corp MySpace $580m

* official 451 Group estimate, Source: The 451 M&A KnowledgeBase

Buyout blues

Brenon Daly

Three years ago, the buyout barons shook up the technology M&A market with the $11.3bn LBO of services giant SunGard. At the time it was the largest tech buyout, equaling basically half the money spent on all LBOs in the previous year. Even as financial acquirers became more active – increasingly their spending sevenfold from 2004-07 – the SunGard buyout stood as the third-largest tech LBO.

SunGard’s brozen-medal placing seemed unlikely to hold at this time last year. There seemed to be a new multibillion-dollar LBO every week, with the targets getting bigger in every transaction. (Remember the half-serious speculation that Microsoft could be taken private?) All that changed in late summer, when debt became more expensive, sending the LBO market into a funk from which it hasn’t recovered. So far this year, LBO firms have announced 49 deals worth $10.3bn, down from 59 deals worth $97bn in the same period last year, according to The 451 Group’s M&A KnowledgeBase.

The change in climate isn’t lost on the financial deal-makers. Underscoring the difficulties in the current credit market, SilverLake’s Alan Austin said at the recent IBF VC Investing Conference in San Francisco that his firm couldn’t pull off a deal like SunGard right now. The buyout firm put in $3bn of equity and borrowed the remaining $8bn. ‘We could never do something like that today – never mind the terms (of the debt)’, Austin said at the conference.

PE deal flow

Period Deal volume Deal value
Jan. – June 2008 51 $11bn
Jan. – June 2007 59 $97bn
Jan. – June 2006  35  $17bn
Jan. – June 2005 25 $24bn

Source: The 451 M&A KnowledgeBase

Bottom-fishing by Blackbaud

Brenon Daly

In almost four years of going head-to-head on the Nasdaq, Kintera never challenged Blackbaud’s stock performance. In fact, it never even came close. An internally funded and smaller rival, Kintera actually jumped ahead of Blackbaud’s IPO by about six months. The company had to trim its offer price in late 2003 to get the IPO out the door, but shares nearly doubled shortly after they hit the market.

Once Blackbaud hit the market in summer 2004, however, Kintera had started a slide from which it would never recover. Blackbaud put Kintera out of its misery last Thursday, shelling out $46m for the struggling company. Kintera was actually in danger of getting delisted from the Nasdaq. (Evercore Partners once again banked Blackbaud, a mandate that we noted last year that has its roots in Redmond, Washington.)

The price values Kintera at basically 1x trailing 12-month sales, while Blackbaud trades at nearly four times that level. Even though Blackbaud didn’t overpay for Kintera, the market has expressed some concern about buying a damaged rival in a deal that will lower Blackbaud earnings this year. Blackbaud shares are down about 7% since announcing the deal.

Kintera is run as a public company, and its paltry exit price certainly won’t help rival Convio get its offering to market. The Austin, Texas-based company filed its S-1 in September and has amended it three times since then. So, it may well be getting ready to price. However, we would note that the income statement of Kintera matches up fairly closely with Convio – both posted revenue of about $45m in 2007, but had negative operating margins. Let’s just hope that the market doesn’t value Convio the same as it did Kintera. 

Recent Blackbaud acquisitions

Date Target Price
May 29, 2008 Kintera $46m
Aug. 6, 2007 eTapestry $25m
Jan. 16, 2007 Target Software $60m

Source: The 451 M&A KnowledgeBase

NetQoS: a small buy on the way to a sale

Brenon Daly2 Comments

On its way to a probable public offering next year, NetQoS has acquired a startup that will boost the company’s offering to the financial services industry. On Tuesday, NetQoS said it’ll pay a small amount of cash for Helium Systems, which makes trade monitoring software. (Helium isn’t expected to add much revenue to NetQos, which has been tracking to $60m this year, up from $45m in 2007.)

Indeed, organic growth has been the story at NetQoS, since the Helium acquisition is the first by the company in nearly two-and-a-half years. But the pace may be about to pick up. The reason? As it gets ready to put together an underwriting ticket for an IPO down the road, NetQoS has found (surprise, surprise) that bankers are also pitching other deals. Meanwhile, for its part, the company has started to look at ways to fill up its corporate coffers if it finds a deal that’s too good to pass up.

Thus far, NetQoS has been remarkably conservative in its capitalization, raising just $21m total. (Liberty Partners, a New York PE firm that typically invests in midmarket companies, is the majority owner of NetQoS and the company’s only institutional investor.) NetQoS, which has been cash-flow positive since 2005, hasn’t taken any outside money in a half-decade. But with an IPO payday likely in 2009, we’re guessing NetQoS wouldn’t have any trouble lining up funds, either from its current backer or even a new partner. 

NetQoS acquisitions

Date Target Rationale
June 2008 Helium Systems Trade monitoring
Dec. 2005 Pine Mountain Group Services
April 2005 RedPoint Network Systems Device management

Source: The 451 M&A KnowledgeBase

Learning Tree seeds sale

Brenon Daly

After more than 30 years in business, Learning Tree International has slapped a ‘for sale’ sign on itself. The IT training shop has retained RBC Capital Markets to guide the process, which comes as the company has only partly worked through a turnaround. It suffered through several years of stagnant revenue and negative operating margins, when the Internet bubble burst and companies cut back sharply on their IT staff members, which, at the time, were Learning Tree’s only customers. (The company has since expanded into management training as well.)

The timing of the possible sale is curious. Learning Tree has come up short of Wall Street estimates for two straight quarters, leaving the company’s stock below where it started the year. (Even with the bounce on May 28 from investors betting on an acquisition, Learning Tree shares have dropped nearly one-quarter of their value in 2008.) Learning Tree currently sports a market capitalization of about $290m, but holds $57m in cash and no debt, lowering its enterprise value to $233m. The company will likely record about $190m in sales in the current fiscal year.

Given the current valuation, maybe some of the executives should take a Learning Tree course on maximizing shareholder value. Of course, the top two executives have a distinct interest in maximizing shareholder value, given that they own nearly half of the company’s 16.6 million shares. Learning Tree cofounders David Collins and Eric Garen own 25.6% and 20.4% of the company, respectively. And if that weren’t motivation enough, we couldn’t help but notice a kicker that could put even more money into the executives’ pockets: The company approved a bonus of one year’s worth of salary for executive officers if Learning Tree gets sold before the end of next March. So, the sellers are ready, but where are the buyers?

Mapping vendor Garmin searches for direction

In a time of increasing competition and decreasing margins, the once-soaring navigation companies seem to have lost their bearings. Former Wall Street darlings Garmin and TomTom both reported lackluster quarters last month. Although overall revenue at both companies is still solid, other lines on the P&L sheet have deteriorated – notably margins. Both companies are now trading near 52-week lows, down roughly 70% from their highs for the year. (Undoubtedly, Garmin will face some investor ire when the company holds its shareholder meeting on June 6.)

With fierce consolidation and price declines, the issue facing Garmin and others is how to differentiate themselves from the new entrants that range from conglomerates Nokia and Research in Motion to small startups such as Dash Navigation. (Looming over all of this is the phenomenal success of Apple’s iPhone.) We foresee 2008 being a year of further consolidation as Garmin continues to shop in an attempt to retain its competitive edge.

Garmin’s gross margins are down to less than 50% from 70% just a few years ago and are expected to decline to below 40% this year, according to CFO Kevin Rauckman. The new competitive environment has forced a steep decline in average selling price: the company’s personal navigation device sold for $500 just a few years ago, but now the gizmo goes for half that amount. Garmin has stated that it intends to stave off the price erosion by setting up its products as a premium brand, much like what Apple did with the iPod. In order to achieve this, Garmin has been looking to make acquisitions in the content segment and will launch its first mobile phone, the Nuvifone, which looks, sounds and works eerily similar to a GPS-enabled iPhone.

So which companies might be ripe for the taking? Aside from the expected distribution acquisitions such as Garmin’s rumored purchase of Raymarine, mapping, traffic and content provider startups such as Dash, Inrix and Networks in Motion offer the kind of technology that Garmin needs. Moreover, if Garmin is serious about branching into the complex mobile phone market, a case could easily be made for an acquisition of longtime partner Palm Inc. The struggling pioneer was reportedly in play last year, but instead opted to have Elevation Partners take a 25% stake in the firm. Palm’s valuation has since been cut in half; we believe the company could surely be had for cheap as investors are eager to recoup their losses. Debt-free Garmin is cash-rich with about $600m, plus another $550m in marketable securities. So financing acquisitions is not a big issue for the company. The real question is whether Garmin can navigate a margin-boosting plan into place before it plummets off a cliff.

Signs of a consolidating industry

Announced Acquirer Target Deal value
Oct. 1, 2007 Nokia Navteq $8.1bn
July 23, 2007 TomTom Tele Atlas $2.8bn

Source: The 451 M&A KnowledgeBase