Category: M&A

S1 is out of one deal, still in a second deal

Brenon Daly

Contact: Brenon Daly

We now know that S1 Corp won’t be a buyer, but whether the financial software company is a seller remains an open question. Late last week, S1 scrapped its three-month-old plans to acquire Fundtech, pocketing an $11.9m breakup fee for its trouble. (That represents a not-insignificant windfall for a company that has only earned $2.2m so far this year, on a GAAP basis.)

Instead, Fundtech will be picked up by private equity firm GTCR in a deal that appears much more straightforward than S1’s original offer. For starters, GTCR is paying in cash, while S1 was planning on a mix of cash and stock. But maybe more importantly, there’s a fair amount of uncertainty hanging over S1 itself, as the company is still fending off an unsolicited acquisition offer.

A month after launching the bid for Fundtech, S1 received an offer of its own from ACI Worldwide. The two sides have been scrapping ever since. S1 has told its shareholders not to back ACI’s proposed bid, warning that there are ‘serious, unaddressed concerns’ such as antitrust challenges and ACI’s plan to raise some $450m in the credit market.

CommVault going it alone

Brenon Daly

Contact: Brenon Daly

Even though many of the storage companies that went public over the past half-decade have subsequently been erased from the market through M&A, don’t look for CommVault to join that list. At least that’s the official word from the top of the company. CEO Robert Hammer said during his presentation at ThinkEquity’s Annual Growth Conference last week that the odds of his company getting acquired are ‘diminimous.’

CommVault is often mentioned as a takeover target, with Dell generally being viewed as the most likely buyer. Dell is CommVault’s largest OEM partner, accounting for a bit more than 20% of the company’s overall revenue. Dell has already purchased a half-dozen storage vendors, including EqualLogic and, most recently, Compellent Technologies. And now that Dell has punted its relationship with EMC, building up its own storage portfolio is a key mandate. (As one of the largest stand-alone backup software providers, CommVault competes primarily with Symantec, but also bumps up against EMC and IBM, among others.)

CEO Hammer says that rather than join the M&A parade, he’s planning to build CommVault into an independent company with sales of $1bn and an operating margin of 25%. That implies CommVault tripling revenue and more than doubling the operating margin. (One of the main reasons why CommVault runs at a relatively low 11% operating margin is because it spends more than half of its revenue on sales and marketing.) Hammer declined to set a timeframe for when the 11-year-old firm would hit those targets.

Braving the IPO market

Contact: Thejeswi Venkatesh

While the IPO pipeline is getting drier, GCT Semiconductor has taken the contrarian route, filing paperwork for its proposed $100m offering. The company, a fabless designer and supplier of 4G mobile system-on-a-chip semiconductor solutions, has seen revenue triple from 2009 to $68.64m. With the mobile industry transitioning to 4G to handle the increase in rich media content, GCT thinks it could be on the verge of seeing sustained growth.

Clearly, that growth is what GCT will be selling on Wall Street. The planned offering resembles the Sequans Communications IPO, with the business profiles and financials of the two companies lining up similarly. For instance, both firms had nearly identical revenue at the time of filing and neither had an operating profit. Sequans came to market in April at 5 times trailing sales, a valuation we suspect GCT would be delighted with, since Sequans is currently trading at 2-3x trailing sales.

Across the tech sector, vendors planning to go public have instead ended up inside companies that are already public. In June, ANSYS pulled Apache Design Solutions from its IPO track and acquired it for $335m. Similarly, SiGe Semiconductor accepted a bid from Skyworks Solutions in May. With Qualcomm, Intel and Broadcom investing heavily in 4G solutions, we wouldn’t be surprised if one of these well-funded players snared GCT.

Shorting follows shopping at KIT digital

Brenon Daly

Contact: Brenon Daly

Following an M&A spree earlier this year that had some on Wall Street skeptical, KIT digital says it’s now in ‘harvest’ mode from its earlier deals. In the first four months of 2011, the video asset management (VAM) vendor scooped up five companies. Although that’s the same number of deals it did in all of 2010, KIT digital’s recent acquisitions have been dramatically larger than the transactions inked last year. The collective tab of slightly more than $200m for 2011 deals is five times the amount the company spent last year.

KIT digital’s big spending brought out some bears. The stock has shed about one-third of its value so far this year, compared to the flatlining Nasdaq. (It dropped another 10% on Thursday after KIT digital announced that it will be selling about $30m worth of shares at a price that’s only slightly above the low point of its valuation over the past year. The stock, which opened the year above $16, traded around $9.50 on Thursday afternoon.)

In addition, the number of people who are shorting KIT digital has doubled since the company started its fast-track M&A program. According to the most recent numbers, nearly 10 million shares of KIT digital are sold short, up from 4.4 million at the start of 2011. Conscious of that, the company said earlier this week at the ThinkEquity Growth Conference that it was almost certainly out of the M&A market for now, and that its financials are getting much ‘cleaner’ now that it has closed – and accounted for – its recent acquisitions.

What lies ahead for independent ESIM vendors?

Contact: Thejeswi Venkatesh, Ben Kolada

Hewlett-Packard recently announced the availability of ArcSight Express 3.0, an upgraded version of the product it acquired last year. In light of this release, we note that independent ESIM vendors aren’t resting on their laurels, either. They continue to develop, innovate and position themselves as potential IPO/acquisition candidates. Competition is already fierce among ESIM players, with each trying to expand their addressable markets, but with HP, Attachmate and Sophos adding ESIM offerings to their portfolios, rivals might look to add to their own to compete effectively.

In a recent report, my colleague Andrew Hay notes that there are several potential acquirers and targets. The list of takeout candidates continues to include Q1 Labs, although there have been M&A rumors around the company for a decade. Q1 Labs is also primping itself for an IPO, but we wouldn’t be surprised if it became the latest target in the growing line of dual-track acquisitions announced so far this year. Given its enviable revenue growth (Q1 Labs reported that its revenue grew 75% in 2010), we expect that Q1 Labs would catch a valuation similar to ArcSight. HP picked up that Cupertino, California-based security provider in September 2010 in a deal valued at nearly 8 times trailing sales. Beyond Q1 Labs, we could point to NitroSecurity, which was allegedly in talks with McAfee earlier this year. We’d also note that McAfee lost out on the ArcSight assets, and could look to NitroSecurity as an alternative.

The ball is rolling in semiconductor networking M&A

Ben Kolada

Contact: Ben Kolada, Thejeswi Venkatesh

In announcing its largest-ever deal, and paying a princely price at the same time, Broadcom is keeping the ball rolling in semiconductor networking M&A. The company’s nearly $4bn pickup of NetLogic Microsystems comes less than two months after rival Intel announced a smaller strategic play of its own, and it likely won’t be the last transaction before the buyout curtain closes.

After a dearth of big-ticket semiconductor networking acquisitions, such vendors are now becoming hot properties. Before announcing its landmark NetLogic purchase, Broadcom itself bought networking provider Teknovus in February 2010 for $123m (in an earnings call, Broadcom mentioned that Teknovus generated revenue in the single digits of millions, which implies a price-to-sales valuation far north of 10x). And in July, Intel announced that it was acquiring Fulcrum Microsystems for a price we hear was in the ballpark of $175m, or about 13x trailing sales.

Broadcom’s richly priced offer for NetLogic, which values the target at 9.2x trailing sales, likely won’t be the last deal in this sector. If you ask The Street, the next companies to get scooped up could be Cavium Networks or EZchip Technologies. Shares of both firms surged following Broadcom’s announcement. As for likely acquirers, we could point to deep-pocketed vendors Qualcomm and Marvell Technology. With $10.7bn and $2.4bn of cash in their coffers, respectively, either company could easily digest Cavium, which currently sports a market cap of roughly $1.7bn.

A deflating bubble

Brenon Daly

Contact: Brenon Daly

If, as some observers suspect, the valuations for tech startups are overinflated, then at least a bit of air is expected to leak out of the bubble. According to our recent survey of corporate development executives, two-thirds of the respondents indicated that they expect valuations for private companies to decline through the rest of the year. The 65% who predicted a slide in the exit prices for startups is more than five times higher than the 12% who projected that valuations would tick higher. (The question about startup valuations was part of a larger survey about M&A expectations for the rest of 2011. See our full report on the survey.)

Interestingly, the mid-2011 outlook is almost exactly the inverse of what corporate development executives told us at the beginning of the year. In our previous survey, 71% forecasted higher M&A valuations for startups this year, compared to just 9% who saw a decline. In fact, the only time the sentiment from our mid-2011 survey even loosely lines up is back in the 2009 survey, which was conducted at the depth of the Great Recession. At that time, nearly nine out of 10 respondents projected that private company M&A valuations in that year would decline, compared to just 5% who predicted an uptick.

Projected change in private company valuations

Period Increase Stay the same Decrease
Mid-2011 for remainder of year 12% 23% 65%
December 2010 for 2011 71% 20% 9%
December 2009 for 2010 58% 36% 6%
December 2008 for 2009 4% 9% 87%
December 2007 for 2008 39% 28% 33%

Source: The 451 Group Tech Corporate Development Outlook Survey

Forget the rebound, many companies see double dip

Brenon Daly

Contact: Brenon Daly

According to many big tech acquirers, the rest of 2011 is shaping up to look an awful lot like 2009. From forecasts for declining valuations to indications of a dramatically more conservative approach to M&A, there was a bearishness in the responses to our special midyear survey of corporate development executives that hasn’t been seen since we were mired in the Great Recession. (See the full report.)

And while the responses to our most recent survey may not have hit the same lows of two years ago, many views began to approach those gloomy levels. In any case, it was a dramatic reversal from the relatively robust forecast given at the beginning of 2011. Taken altogether, the responses to our most recent survey indicate that there’s a growing concern about a recessionary ‘double dip’ that threatens to stall dealmaking for the rest of the year.

Just one-third (32%) of the corporate development executives we surveyed last month indicated that they expected their company to pick up the pace of M&A in the second half of 2011, down half (52%) from those who predicted an acceleration for full-year 2011 in our survey back in December. Meanwhile, the number who projected a slowdown more than doubled to 18% from 7%. Another way to think about it is that nearly one out of five people told us that their company won’t be as busy in the remainder of the year as it was in the first half of 2011.

Projected change in M&A activity

Period Increase Stay the same Decrease
Mid-2011 for remainder of year 32% 50% 18%
December 2010 for 2011 52% 41% 7%
December 2009 for 2010 68% 27% 5%
December 2008 for 2009 44% 33% 23%

Source: The 451 Group Tech Corporate Development Outlook Survey

The ever-rising costs of HP’s makeover

Brenon Daly

Contact: Brenon Daly

The bill for Hewlett-Packard’s makeover just keeps climbing. Even beyond the $10bn that has been erased from the market valuation of the company since announcing its unprecedented reorganization, the ailing giant is facing some real cost in the coming days.

For starters, it’s on the hook for $11.7bn to cover its pending purchase of information management vendor Autonomy Corp. That’s no small amount. In fact, it stands as the largest price paid for a software company in seven years. (And it’s one of the richest, valuing Autonomy at almost 12 times trailing sales, while HP itself currently trades at just 0.4x sales.) On top of that, there’s also the $1bn charge that’s looming for the shutdown and restructuring of the ill-fated webOS business.

But both of those costs are likely to be chump change compared to the losses that HP likely faces in getting rid of its Personal Systems Group (PSG) – assuming the company even finds a buyer for its desktop and laptop business. Recall that HP paid roughly $25bn in stock for Compaq, a consolidation move that made HP the largest single vendor of PCs. If it is able to sell that division now, we figure HP would be lucky to get about $5bn for it, or roughly one-fifth the amount it originally paid. (See our full report on HP and the rest of the PC industry.)

In calculating the potential purchase price for PSG – and this is strictly on a back-of-the-envelope basis – we looked back on what IBM got when it divested its PC business back in late 2004. Big Blue’s business was generating about $9bn in sales, and Lenovo paid just $1.75bn in cash and stock, plus the assumption of debt. HP’s PC business is slightly more than four times larger, so applying that loose multiple gets us into the neighborhood of $7bn.

However, a couple of factors will undoubtedly put some pressure on the multiple for HP. First, we would argue that IBM had a much more valuable brand with its ThinkPad line than the HP/Compaq brand. But far more important than those specific concerns around brands is the fact that the broader PC market has eroded significantly in the half-decade since Big Blue divested its business. To get a sense of just how far the PC market has fallen, consider the results from the most recent survey of consumers from our sister company, ChangeWave Research. Earlier this month, just 7% of respondents indicated that they expected to buy a laptop in the coming 90 days, with just 3.5% indicating that they planned to buy a desktop.

Buying and building at salesforce.com

Brenon Daly

Contact: Brenon Daly

At the rate Marc Benioff is going, we have to wonder how long it will be until he renames the company he founded. Or at the very least, shouldn’t Benioff, who founded salesforce.com in 1999 and continues to serve as the company’s CEO, be thinking about swapping the company’s current ticker (CRM) for something that captures the broad, all-encompassing vision for the ‘social enterprise’ that he laid out at last week’s Dreamforce?

After all, the company’s core sales force automation (SFA) product barely merited a mention at the conference. Instead, most of the attention was directed toward upgrades and expansions to the Chatter and Radian6 offerings, as well as moves to broaden its two main platform plays, Heroku and Force.com. As such, Dreamforce dramatically underscored just how much of salesforce.com’s future has been staked on its M&A program.

Of course, virtually all tech vendors use acquisitions to change the trajectory of their business, whether it’s a slight nudge in some new direction through a tactical purchase (Informatica comes to mind) or roll-the-dice-and-bet-the-company transformational transactions (Dell and, more painfully right now, Hewlett-Packard.) But hardly any other tech company (with the possible exception of VMware) has used M&A so consistently to expand beyond its original offering while still managing to preserve an acrophobia-inducing valuation.

Just consider the role that acquired companies played in announcements around salesforce.com’s conference:

  • Chatter has been bolstered by the purchase of two firms (GroupSwim and Dimdim), as has Service Cloud (InStranet and Activa Live). Service Cloud is salesforce.com’s largest non-SFA product.
  • The Data.com product, which was launched at the show, goes back to the purchase of Jigsaw Data in April 2010. It was further bolstered last week through a partnership with company records provided by Dun & Bradstreet.
  • Heroku was acquired last December, and salesforce.com noted at the conference that the platform currently has triple the number of customer applications built on it than it did a year ago.
  • The social media monitoring capabilities that salesforce.com obtained with its acquisition of Radian6, which was announced in late March, are only starting to make their way into the products but are a key part of the ‘social enterprise’ that the company has described.

Altogether, salesforce.com noted that non-SFA offerings – in other words, products and technology that got significant boosts through acquired IP or engineers – accounted for a full 20% of second-quarter revenue. (That was the first time the company has broken out revenue for its new products.) Given that salesforce.com booked nearly $550m in Q2 revenue, that would imply non-SFA sales of about $110m. To be clear, very little of that amount has come directly from the acquired companies, all of which were still in their early days. Instead, it’s the net result of the ‘buy and build’ approach at salesforce.com.