Category: M&A

No bear market for M&A in August

Brenon Daly

Contact: Brenon Daly

Boosted by two blockbuster transactions, spending on tech deals announced in August surged to $40bn, the second-highest monthly total since the end of the Great Recession. In fact, the aggregate deal value for the just-completed month came in roughly 2-3 times higher than typical monthly spending over the past year. (The exception, of course, came in March, when AT&T announced its $39bn cash-and-stock acquisition of T-Mobile. However, that deal may not go through, as the US Department of Justice earlier this week moved to block the combination, which would create the largest US wireless carrier.)

More than half of the overall spending in August came from just two announced transactions: Google’s $12.5bn purchase of Motorola Mobility and Hewlett-Packard’s $11.7bn pickup of Autonomy Corp. (Incidentally, those deals spanned the range of valuations, with Google paying less than 1x sales for Motorola’s handset business while HP is paying more than 10x sales for the information management vendor.) In addition, there were other transactions of note in August, including the $3bn buyout of Emdeon, Datatel’s $1.8bn reach for SunGard’s education division and Windstream Communications’ $891m consolidation of PAETEC.

Overall, dealmakers remained surprisingly busy in August. For the fourth month in a row, we tallied more than 300 deals, a level that’s about one-third higher than it was a year ago. The activity is all the more unexpected when we think back to the whip-sawing markets we had in the first week or so of August, not to mention the fact that the Nasdaq shed 7% of its value in the month. At one point in August, the index sank to a level it hadn’t hit since early October 2010.

Ness gets a scant sendoff

Brenon Daly

Contact: Brenon Daly

Three-quarters of Ness Technologies shareholders have backed the planned $307m take-private of the IT services vendor, clearing the way for the sale to Citi Venture Capital International (CVCI) to close by the end of the month. CVCI acquired nearly 10% of Ness in early 2008 and first offered to pick up the whole company in July 2010, according to the proxy filed in connection with the proposed deal.

Last summer, CVCI indicated that it would be looking to pay $5.50-5.75 for each Ness share it didn’t already own. Three financial buyers who also got involved in the bidding last fall indicated that they would be prepared to top that by about a dollar a share. In the end, CVCI agreed to pay $7.75 for each share, roughly one-third more than the opening bid from the buyout shop .

And yet, despite the topping bid, Ness is exiting the public market at what would appear to be a rather paltry valuation. The company recently reported that it was tracking to about $600m in sales for 2011, and yet is selling for just $307m. (Including Ness’ small net debt position, the enterprise value of the deal is $342m.) That works out to a scant 0.6 times trailing sales – just one-third the median price-to-sales valuation for US publicly traded companies so far this year, according to our calculations.

Some of that can be attributed to the fact that IT services vendors typically trade at a substantial discount to other technology firms. And yet, even within recent IT services deals, 0.6x trailing sales is the low end of the range for most acquisitions. (For instance, EDS went for that multiple in its sale to Hewlett-Packard in mid-2008, while Perot Systems got more than twice that (1.4x) in its purchase by Dell in September 2009.) In fact, Ness is selling to CVCI for a lower price than it fetched on the open market more than three years ago when the buyout shop first took its stake.

Limelight lightens its load

Ben Kolada

Contact: Ben Kolada

In a move to streamline its operations, Limelight Networks is divesting its EyeWonder assets to DG FastChannel. Although the deal comes at a considerable discount – DG’s $66m all-cash offer is only slightly more than half the amount that Limelight paid in cash and stock for EyeWonder less than two years ago – it should help the ailing CDN vendor focus on its core business. It could even pave the way for a sale of Limelight.

As my colleague Jim Davis notes, Limelight’s original decision to buy EyeWonder appeared strategically sound. The idea was that EyeWonder would funnel new customers to the Limelight CDN. That could have worked, but a missed development target meant that ad agencies were taking business elsewhere this year. As a result, revenue for the acquired company essentially flatlined. When Limelight picked up EyeWonder in December 2009, the target generated some $35m in trailing sales. The outlook two years later isn’t much better. New owner DG FastChannel indicated that it expects revenue from the acquired property to max out at $37m this year.

Wall Street appears to back the asset sale. Following the announcement, shares of Limelight closed the day up nearly 6% on volume that was almost triple the monthly average. Although the company has lost half its market value this year, due in large part to flat revenue growth and third-quarter revenue guidance that came in below analysts’ expectations, an opportunistic acquirer could swoop in to scoop up the company. Following the slide in share price, Limelight is sporting a market cap of just $300m. Add in the more than $100m of cash in its coffers and little debt, and the company could be had for relatively cheap for an opportunistic buyer.

Confab-ulous M&A at two cloud companies

Brenon Daly

Contact: Brenon Daly

Two of the most richly valued tech companies are each hosting annual get-togethers this week, and M&A is figuring into both of the confabs. VMware opened VMworld in Las Vegas on Monday, while saleforce.com followed a day later with Dreamforce in San Francisco. As these companies were getting ready to open the doors for the event, both announced that they had done acquisitions – with both deals coming in the security market.

VMware reached for PacketMotion, a startup that was able to capture who’s doing what on a network and whether they should be doing that at all. VMware indicated that the acquisition should allow its customers to automate security and compliance policies. For its part, salesforce.com added encryption vendor Navajo Systems. While terms weren’t announced on either transaction, we suspect that the price tags for both startups were in the low tens of millions of dollars. On the other side, we’d note that, collectively, VMware and saleforce.com are valued at north of $50bn.

Part of the tremendously rich valuation that both VMware and salesforce.com enjoy can be chalked up to the fact that each company is the sort of corporate representation for two key components of the whole cloud computing model: VMware for virtualization and salesforce.com for on-demand delivery of software and, more recently, infrastructure.

So it’s no surprise that these cloud stalwarts both recognized the need to shore up their cloud offerings by going out and buying security startups. After all, security remains probably the most important concern for broader adoption of cloud computing. In a recent survey, our sister organization ChangeWave Research asked both IT purchasers and users at companies to rate the security of current cloud offerings on a scale of 1 (very unsecure) to 10 (very secure). The median response was a distinctly middling 5.6. As a point of reference, the rating for cloud security was actually lower than the median rating for the reliability of cloud offerings, even after several high-profile outages at Amazon Web Services so far this year.

Corel erases iGrafx from its portfolio

Brenon Daly

Contact: Brenon Daly

A decade after picking up iGrafx, the private equity-backed Corel firm has divested the business process management (BPM) software company to newly formed buyout shop The Limerock Group. The move should allow new focus and resources for iGrafx, which was always an odd fit inside Corel. For its part, iGrafx sold almost entirely to enterprises, while Corel is known as a home for many faded, second-rate consumer brands, such as WordPerfect and PaintShop.

Perhaps not surprisingly, the iGrafx business suffered from a bit of neglect inside Corel. At one point, we understand the business was generating about $20m in sales, although it is probably only running at about half that level now. One area that iGrafx will undoubtedly look to expand is around consulting and other services that tend to play a not-insignificant part of BPM deployments. IGrafx may look to build that up through internal development, or the newly capitalized company could tuck-in a small consulting shop.

The move by Limerock, a firm founded by the team that built and eventually sold NetQoS for $200m, comes after a number of big-name buyers have inked BPM deals of their own over the past two years. (Limerock was advised by Northside Advisors, while Pagemill Partners worked the other side.) Significant acquirers that have bought their way into the market since mid-2009 include IBM, Software AG, Progress Software and Open Text. Valuations for these BPM deals has ranged from roughly 1x sales to almost 6x sales. Given iGrafx’s slumping sales and its awkward fit inside Corel, we suspect the business would have likely traded at the low end of that range.

Verizon drives toward convergence with CloudSwitch buy

Ben Kolada

Contact: Ben Kolada, Antonio Piraino

True to its intentions of bolstering its cloud prowess and less than half a year after completing its Terremark Worldwide purchase, Verizon Communications has now acquired cloud onboarding provider CloudSwitch. The timing of the deal comes as a surprise – CloudSwitch was still in startup mode – but that only goes to show the strategic importance Verizon is placing on this technology. CloudSwitch provides a proprietary technology that helps Terremark onboard workloads from internal IT infrastructure to its cloud platform in a more seamless and non-reconfigurable way.

CloudSwitch is addressing the first hurdle faced by the cloud platform proposition – how does a company with an established IT practice even begin to consider transitioning to the cloud? ‘Bursting’ over to the cloud, and making it so that applications can shift seamlessly to the cloud without rewriting code, is a good start. Giving enterprise system administrators the ability to point and click through an entire datacenter migration project is highly attractive for operations staff to consider migrating to a cloud environment. Even though hybrid mixes of in-house and off-premises resources are expected to exist for quite some time, there is still a considerable opportunity for providers in the space.

My colleagues at Tier1 Research don’t believe that Verizon/Terremark is finished building on this enterprise cloud play. When it has developed the infrastructure (including onboarding and orchestration layers), they expect that it will continue to move further up the IT stack. And in this era of heavy M&A activity, there’s a fine line to be drawn between buying prior to proven maturity and possessing technology before your competition grabs it, making this a good investment for Verizon/Terremark.

RealPage gets diluted on a deal

Brenon Daly2 Comments

by Brenon Daly

Exactly a year after going public, RealPage on Monday evening announced its largest-ever acquisition. However, the $74m cash-and-stock purchase of MyNewPlace didn’t exactly go over with Wall Street as the property management software vendor might have hoped. The recently minted shares of RealPage dropped 11% on heavy trading, hitting their lowest level since just about a month after their debut.

The concern? The acquisition will lower earnings at the company, trimming non-GAAP net income at RealPage by more than $1m this year. Conscious of the dilution, RealPage opened the conference call discussing the deal in an almost apologetic tone, acknowledging that it paid ‘a lot’ for MyNewPlace. In fact, the purchase price of this latest transaction is only slightly more than RealPage paid, collectively, in its three previous acquisitions.

But on the other side, the deal positions the company to be more relevant in the lead generation part of the rental housing market, which is undergoing dramatic changes. During the call, the company estimated that it would take five years and an investment of $30-40m to build a business, internally, that would do what MyNewPlace does right now. So, RealPage billed the purchase as a play to be more relevant in the long term. After a year on the market, we would have thought that RealPage would already know enough about the myopic vision on Wall Street to not talk about delayed gratification from acquisitions.

Stepping to the sidelines

Brenon Daly

Contact: Brenon Daly

Despite a few high-profile acquisitions recently, companies are tempering their buying plans for the rest of the year. At least that’s what they indicated in our ‘flash’ survey of corporate development executives, which we closed last week after a record turnout. Nearly 100 respondents offered their views on what they expect in both the M&A market as well as for IPOs for the balance of 2011.

In terms of projected activity at their own companies, just one-third of the respondents indicated that they expected their company to pick up the pace of M&A during the rest of the year. That’s down from 50% who said that for full-year 2011 in our main survey back in December. On the other side, the number projecting a slowdown in their own shopping more than doubled from 7% to 18% here in August.

For a full discussion of the survey – along with our own projections for deal flow, valuation and trends for the rest of 2011 – please join us Tuesday at 11:00am PST for a special webinar on tech M&A. Registration for the free one-hour event can be found here.

A longshot for Leo?

Brenon Daly

Contact: Brenon Daly

Hewlett-Packard is now, officially, Leo Apotheker’s company. Since his somewhat surprising appointment as HP’s chief executive last fall, Apotheker has been taking small steps while also dropping big hints that he would be recasting the tech giant. But few observers could have imagined the almost unprecedented scope of the transition that Apotheker laid out late Thursday: HP will be integrating the largest acquisition in the software industry in seven years while simultaneously looking into selling off its hardware business.

Wall Street appears to be skeptical that HP can pull that off, as shares in the company on Friday sank to their lowest level since mid-2006. (Incidentally, that’s just before Apotheker’s predecessor, Mark Hurd, took over the company.) On their own, either one of HP’s dramatic moves (working through the top-dollar acquisition of Autonomy Corp and possibly selling the world’s largest PC maker) would be enough to keep any company busy. Taken together, the combination appears doubly difficult. And that’s even more the case for HP, which, to be candid, has a spotty record on M&A.

Consider this: Autonomy will be slotted into HP’s software unit, which has been built primarily via M&A. But that division runs at a paltry 19% operating margin, less than half the rate of many large software companies, including Autonomy itself. And then there’s the $13.9bn HP spent in mid-2008 for EDS in an effort to become a services giant. So far this year, however, that business hasn’t put up any growth. And perhaps most damning is the fact that HP now doesn’t really know what it will do with its hardware business – a unit that largely comes from the multibillion-dollar purchases of Compaq Computer and Palm Inc.

Microsemi opens the hostilities

Brenon Daly

Contact: Brenon Daly

In a bear-hug letter last month, Microsemi warned fellow chipmaker Zarlink Semiconductor that it was ready to ‘take all necessary actions’ to consolidate the Canadian company. On Wednesday, that came to pass: Microsemi said it would bypass Zarlink’s board, which shot down the unsolicited offer, and take its $549m all-cash bid directly to shareholders. Incidentally, the opening of this hostile offer in the semiconductor industry came on the same day that SABMiller launched its $10bn hostile bid for Australian brewer Foster’s Group.

Going hostile in deals is relatively rare, as the drawn-out procedure can be expensive and disruptive to business on both sides. Further, in the tech industry, the conventional wisdom has always been that hostile approaches would cause an exodus of employees at the target company, undermining the very reason for the acquisition. (Given our realpolitik view of the world, we’ve always been a little bit skeptical about that bromide. We just can’t help but think back a few years ago to how PeopleSoft, with its culture of hugs and Hawaiian shirts, stood up to the relentless push by Oracle.)

Whatever the theoretical concerns, Microsemi must have certainly factored them in before launching the offer. The company says it has the financing in place, and will have its bid open through September 22. (Morgan Stanley and Stifel Nicolaus Weisel are advising Microsemi, while Ottawa-based Zarlink is relying on RBC Capital Markets.) It’s hard to know exactly which way Zarlink shareholders will go on this one, but we can’t help but note that shares on the Toronto Stock Exchange have already traded through the bid since Microsemi floated its offer.