Category: M&A

Uncertainty chills M&A in July

Brenon Daly

Contact: Brenon Daly

One month into the third quarter, and it looks like tech M&A activity is returning to a ‘normalized’ post-recession level. In August, we tallied global spending on tech and telco deals of just $12bn – putting Q3 on track for about $36bn of aggregate deal value. If the pace holds for the July-September period, the level would essentially match spending in Q3 2009, when the global economy was still mired in the Great Recession.

Overall, since the housing market speculation and related financial industry meltdown knocked the economy into a tailspin, tech M&A activity has ranged, loosely, from $30-50bn per quarter. As mentioned, Q3 2009 was at the low end of that while Q3 2010 was at the high end, with $46bn of announced deal value. (We noted a cold snap in the market in June, which knocked spending to just $10bn – less than half the level it had been in April and May.)

The relative weakness in M&A in the just-completed month of July came as larger economic concerns weighed on the overall market. A number of tech companies (including STEC, Juniper Networks, Riverbed Technology and Fortinet, among others) reported weaker-than-expected results last month, in some cases due to sluggish international sales. Meanwhile, closer to home, the US government teetered on the brink of default at the end of July, although a last-minute agreement to raise the debt ceiling may have headed that off. Nonetheless, the uncertainty around the outlook for the second half of 2011 appears to be blunting the appetite for acquisitions.

2011 activity, month by month

Period Deal volume Deal value
July 313 $12.2bn
June 297 $9.6bn
May 316 $26.5bn
April 287 $26.5bn
March 300 $63.7bn
February 285 $10.3bn
January 323 $11.7bn

Source: The 451 M&A KnowledgeBase

Taking care of unfinished business, Oracle snares InQuira

Ben Kolada

Contact: Ben Kolada

Oracle scratched a lingering itch recently, as it announced that it is acquiring knowledge management and customer service automation vendor InQuira for an undisclosed amount. The announcement comes nearly three years to the day after Oracle was stinted by salesforce.com in its attempt to scoop up InQuira rival InStranet. And although terms of the deal weren’t disclosed, we suspect that the database giant paid up for its expansion in this sector.

As usual, Oracle hasn’t disclosed terms of the transaction. Nearly all precedent deals in this sector have fallen in the range of $30-50m. However, InQuira could have broken this benchmark since the company was growing and was more mature than its acquired rivals. InQuira has expanded from about 135 employees serving 50 customers when we last covered the firm in 2008 to more than 85 customers today, with a headcount surpassing 200. Assuming its average deal size has remained somewhat constant, we would roughly place the company’s trailing revenue in the ballpark of $55-65m. Based on precedent valuations (comparable transactions have been valued at 1.3-1.8 times trailing sales) and our loose estimates of the company’s revenue, Oracle could have paid about $100m for InQuira. In comparison, salesforce.com forked over just $32m for InStranet in 2008.

Privately held InQuira offers integrated applications for Web self-service, knowledge management and agent-assisted support by bringing together intelligent retrieval, content management, collaboration and analytics. The acquisition, which is expect to close in the fall, will become the core of Oracle’s Fusion CRM product line.

InterNap’s time as a takeover target could be running out

Ben Kolada

Contact: Ben Kolada

If its past is any prediction of its future, hosting services provider InterNap Network Services could soon lose its position as the industry’s next takeover target. The Atlanta-based firm, which is set to release its second-quarter results, has seen flat sales for the past three years. This is in stark contrast to the hosting industry at large, which has historically grown in the double digits. Meanwhile, other firms are emerging as more desirable targets, pushing InterNap to the back of the buyout line.

Our colleagues at Tier1 Research have written that InterNap was a favored takeover target. However, the firm appears to have since lost its luster. Investors are becoming increasingly frustrated with its poor performance, particularly after first-quarter total revenue declined 6% year over year. And shareholders once again fear the worst – in the past month, shares of InterNap have lost more than one-tenth of their value.

As InterNap is lying stagnant, other firms are posting enviable growth rates, making them much more attractive acquisition candidates. We understand that privately held SoftLayer is gearing toward the public markets, though it could certainly be scooped up before filing its paperwork. SoftLayer surpassed InterNap’s revenue last year, and is projecting bottom-line growth of about 20% this year, to just shy of $350m. InterXion has been cited as a potential target, as well. The company is also enjoying double-digit growth rates, and would provide a large platform for any telco looking to expand its European hosting footprint.

We would note, however, that both InterXion and SoftLayer are considerably pricier properties. While InterNap currently sports a market cap of about $330m, InterXion is valued at nearly $1bn. And we estimate that SoftLayer, on its own, cost GI Partners some $450m. However, when including the other legs of the SoftLayer platform – Everyones Internet and The Planet – the full price to the buyout shop could exceed $600m. But InterXion’s and SoftLayer’s price tags won’t necessarily stand in the way of their sales. We would never have guessed that CenturyLink would have been able to afford Savvis, especially so soon after closing its $22bn Qwest purchase.

Verint reaches for Vovici

Brenon Daly

Contact: Brenon Daly

Once pretty much a company that only offered call recording, Verint has expanded its business over the past two decades through a series of acquisitions. Most recently, it reached for Vovici, adding the startup’s online surveys offering to its voice-of-the-customer portfolio. Vovici will be slotted into Verint’s Workforce Optimization (WFO) unit, which accounts for more than half of the company’s overall revenue.

However, we don’t expect that Vovici will substantially boost the top line at the WFO division. That business runs at about a rate of $100m per quarter, while we understand that the Herndon, Virginia-based startup was generating somewhere less than $15m in revenue. Verint is paying $57m in cash, with a possible earnout of up to $20m if certain undisclosed milestones are hit. That makes it Verint’s largest acquisition since the $1.1bn purchase of Witness Systems in early 2007.

Dual track, but singular outcomes

Brenon Daly

Contact: Brenon Daly

For the third time in just two months, a tech company that had planned to go public has instead ended up inside a company that’s already public. The latest dual-track sale came Wednesday when Force10 Networks opted to accept a bid from Dell rather than see through its IPO plan. The networking gear vendor had filed its prospectus in March 2010.

The deal follows one month after would-be debutant Apache Design Solutions sold to ANSYS and two months after SiGe Semiconductor went to Skyworks Solutions. Those three transactions probably only generated about $1.2bn in liquidity, including Force10’s reported price of roughly $700m. (As a side note, we might point out that Deutsche Bank Securities was a book runner on all three proposed IPOs.)

As this trio of enterprise-focused startups finds itself snapped out of the IPO pipeline, consumer-oriented companies continue to receive a warm welcome on Wall Street. Consider this: Zillow, which went public earlier this week, now trades at about 20 times trailing revenue. In contrast, Force10, SiGe and Apache Design garnered much more modest valuations ranging roughly from 2-6x trailing revenue in their sales.

Riverbed buys Zeus, but shares go to Hades

Brenon Daly

Contact: Brenon Daly

Announcing the largest deal in its history, Riverbed Technology said it will hand over $110m in cash for Zeus Technology in an effort to broaden its application performance portfolio. Zeus, which sells software for load balancing and traffic management, generated about $12m in revenue over the last year and is expected to contribute some $20m in sales for the coming year. That means Riverbed is paying nearly 10 times trailing sales for Zeus, and that’s not including a potential $30m earnout for the UK-based startup. (Fellow UK-based firm Arma Partners advised Zeus on the sale.)

In addition to being a rather richly valued purchase, the acquisition of Zeus also effectively doubles the amount that Riverbed has spent, collectively, on M&A in its history. The deal will likely bring Riverbed more deeply into competition with the main application delivery control vendors, including F5 and Citrix.

From our perspective, we might note that it’s a good thing Zeus is taking its payment in cash. Why? Riverbed stock lost nearly a quarter of its value on Wednesday. (The WAN traffic optimization provider reported a bit of softness in sales in Europe for the second quarter.) The decline erased all of Riverbed’s gains for 2011, but the stock is still twice the level it was at this time last year.

Intel buys Fulcrum to further datacenter product push

Contact: Thejeswi Venkatesh, Ben Kolada

In a move that further boosts its 10-Gigabit Ethernet push, Intel has announced that it will acquire Fulcrum Microsystems, a fabless semiconductor company that developed the fully integrated FocalPoint family of 10Gb and 40Gb Ethernet switch chips. The acquisition advances Intel’s desire to transform itself into a comprehensive datacenter provider that offers computing, storage and networking building blocks.

Terms of the deal were not disclosed, though we estimate that Fulcrum generated about $13m in revenue in the 12 months before its sale. For a comparable transaction, we could look to Broadcom’s November 2009 acquisition of Dune Networks for about 3 times trailing sales, or twice the median for all semiconductor design deals announced so far this year. However, given Fulcrum’s strategic importance to Intel, we wouldn’t be surprised if its valuation is not only higher than the median, but also surpasses Dune’s. We would also note that Intel already had an insider’s view into Fulcrum – its venture investment arm, Intel Capital, provided mezzanine financing to Fulcrum in 2010.

Connecting thousands of nodes at maximum bandwidth is the holy grail of datacenter networking. Fulcrum’s FocalPoint portfolio provides high-performance, low-latency network switches to support evolving cloud architectures and the growth of converged networks in the enterprise. Intel’s earlier foray on this front was with InfiniBand, which it supported for many years before finally being squeezed out by faster, ultra-low-latency architectures like AMD’s HyperTransport consortium on the one end and on the other end by cheaper but slightly slower 10GigE. Intel has been supportive of 10Gb architecture and this acquisition further enhances that strategy. More importantly, 10GigE makes more sense for Intel if it is looking for a common single interconnect architecture for datacenters, since all applications run on it anyway.

Mirror moves at CA and Compuware

Contact: Brenon Daly, Dennis Callaghan

Both Compuware and CA Technologies recently announced deals for application development and the related field of performance monitoring in which the transactions themselves shared more than a few similarities. The two acquisitions saw the old-line companies, with their corporate roots in the mainframe era, paying nearly double-digit multiples for startups that have been doubling sales each year. Further, each buyer was adding the acquired technology to an existing management platform that has largely been shaped by earlier M&A.

In the first transaction, CA Technologies announced that it will hand over $330m in cash for ITKO, which adds testing capabilities to CA’s management portfolio as well as makes the company more of a player in ‘devops’ as cloud adoption blurs the roles between development and operations in IT departments. The following week, Compuware paid $256m in cash for dynaTrace Software to bolster its business transaction management offering, particularly in the area of pre-deployment performance monitoring, which goes hand-in-hand with testing. The two deals mean that the companies will be competing hard against each other in distributed systems performance testing and monitoring, especially around Java applications.

For the targets in the purchases, though ITKO and dynaTrace were focused on slightly different markets, the two startups had a number of traits in common. Both were founded far from Silicon Valley and went on to be parsimonious fundraisers, each drawing in only about $20m. (In other words, an exit price that was 10 times greater than the money that went into the company.) Both startups had more than 100 employees and were tracking to top $50m in sales next year. And finally, both startups went with boutiques to advise them on the sales, with ITKO tapping Qatalyst Partners and dynaTrace working with Pacific Crest Securities.

After CenturyLink-Savvis, telco consolidation will target the midmarket

Ben Kolada

Contact: Ben Kolada

CenturyLink’s Savvis acquisition, which closes today, is the largest telco-hosting deal on record, though we expect that it will be followed by a rise in smaller telco-hosting pairings. As the number of large hosting targets, which typically serve enterprises, continues to shrink, we anticipate that telcos that were unable to get their hands on prized enterprise properties will still look to enter this industry by consolidating the fragmented small and midsized hosting market.

Based on the most notable telco-hosting deals to date, Verizon’s Terremark buy and CenturyLink’s reach for Savvis, enterprises appear to be the primary market for large telcos looking to sell cloud services. However, we are noticing emerging interest from telcos looking to serve SMBs. Last month we saw Madrid-based telco Telefónica spend a reported $110m for cloud hoster acens Technologies, which serves more than 100,000 SMB customers throughout Spain. On a much smaller scale, in February local competitive carrier CornerStone Telephone announced that it was picking up consumer and SMB-focused Web hoster ActiveHost for an undisclosed amount.

We’ve written before that the greatest opportunity for telco-hoster combinations may actually be for regional and smaller telcos to buy smaller hosters. The hosting market is still fragmented, particularly among smaller providers, and many of these firms are experiencing capital constraints that are preventing expansion. Regional and local telcos will be able to take advantage of this fragmentation and acquire small complementary hosting providers without spending too much money, since smaller providers tend to garner smaller valuations, typically between 6-8 times last-quarter annualized EBITDA. However, if telco-hosting consolidation grows at this level, the acquired properties will most likely be colocation-focused, since most small hosting providers founded their business on colocation services.

EA gets serious about casual gaming

Contact: Brian Satterfield

In an expensive nod to the ever-increasing importance of online social media and mobile gaming, Electronic Arts has reached deep into its pockets to purchase Seattle-based PopCap Games for $750m. The transaction, which could end up costing EA as much as $1.3bn if the full earnout is hit, stands out as not only the priciest acquisition in EA’s history, but also the largest-ever deal in the online videogame sector.

This isn’t the first time that EA, best known for its console titles, has had to pay big to bring its gaming portfolio up to date. In 2005, the company entered the mobile sector with the $680m acquisition of Jamdat Mobile, then took out social gaming vendor Playfish for $300m in late 2009. However, the diversification has been slow. Sales of console-based games still accounted for 70% of EA’s total revenue in the just completed fiscal year. Overall revenue at the company was flat and EA guided for only slight growth in the current fiscal year.

In contrast, sales at social gaming upstart Zynga more than quadrupled last year. It’s all but certain that when Zynga, which filed its IPO paperwork earlier this month, hits the market, it will be valued higher than EA’s current market cap of just less than $8bn.

With the acquisition of PopCap games, EA now boasts six of 2010’s top 10 revenue-grossing iOS games and roughly 10 million daily average players on Facebook. But EA still has a long way to go if it hopes to grab a larger slice of Zynga’s daily average user base on Facebook, which currently numbers about 53 million.