Category: M&A

Is anyone going to play Violin?

Brenon Daly

Contact: Brenon Daly, Henry Baltazar

As Fusion-io continues to bask in the glow of its newly created billion-dollar valuation, Wall Street is already looking for the next solid-state storage specialist. Conveniently enough, Violin Memory popped up earlier this week, announcing a $40m round at a $440m valuation. (It’s pure coincidence, certainly, that Violin – headed by the same guy who used to head Fusion-io – picked the same week as Fusion-io’s debut to trumpet not only the new investment but also the valuation it fetched. Just a fluke of the calendar, of course.)

Whatever the motivation for landing two rounds of funding in just four months, Violin also talked about topping $100m in sales this year, which would certainly put it on track for an IPO of its own. Provided, that is, the company intends to go public. If it should opt to head for the other exit and sell, we suspect that the most interested bidder in Violin may well be Hewlett-Packard.

The two companies have been publishing benchmark results from a combined offering, and HP undoubtedly could use the technology boost to more effectively compete with Oracle, which has been punching HP every chance it gets. (Oracle’s none-too-subtle ‘cash for clunkers’ ad campaign around HP servers comes to mind.) Another possible suitor for Violin would be Juniper Networks, which has already invested in the startup.

Telefónica nabs cloud hosting firm acens Technologies

Ben Kolada

Contact: Ben Kolada

Consolidation between the telecommunications and hosting industries continued today with Madrid-based telco Telefónica purchasing cloud hosting and colocation provider acens Technologies from buyout shop Nazca Capital. Although this deal seems to be just another in the long line of telco-hosting pairings, it actually represents one of the biggest foreign consolidations that we’ve seen.

Terms of the transaction weren’t disclosed, though public reports claim that Telefónica shelled out approximately €75m ($110m) for the hosting vendor. With some loose math based on applying acens’ historical growth rate to the €30m ($43m) in revenue that Nazca claims acens generated in 2009, we estimate that the company’s 2010 total revenue was likely in the ballpark of €35-40m ($46-53m). If our estimates are correct, that price-to-sales valuation would be slightly less than what Nazca paid for acens in January 2007, though it would still represent a nearly 100% return on capital in just four years. We’ll have more context on this deal, including analysis from our cloud infrastructure and hosting colleagues at Tier1 Research, in a full report in tomorrow’s Daily 451.

Apple drops interest in Dropbox for iCloud

Brenon Daly

by Brenon Daly

Earlier this year, rumors were flying that Apple was putting together a bid – valued at more than $500m – for cloud storage startup Dropbox. That speculation obviously didn’t go anywhere, but it looked a whole lot more credible in light of Monday’s introduction of Apple’s online storage and synching offering, iCloud. The service, which will be free for up to 5GB, will be available in the fall.

On the face of it, Apple’s new service looks mostly like a convenient and efficient way to move iTunes into the cloud. Viewed in that rather limited way, iCloud appears to compete most directly with Google and Amazon, which have both launched online music storage offerings in recent weeks. But as is the case with most of what Apple does, there’s much more going on.

In addition to automatically storing and synching media files such as music, photos and movies, iCloud will keep up-to-date documents as well as presentation and other files. In other words, the uses for iCloud are pretty much exactly the same reasons why some 25 million people also use Dropbox. Is this yet another case of a Silicon Valley giant initially looking to buy but then opting instead to build?

A valuable deal for Groupon

Brenon Daly

Contact: Brenon Daly

As it preps for its public debut, we note that Groupon, the coupon giant known for offering consumers deals up to 90% off, did a bit of smart bargain shopping of its own last summer as it made an important purchase to expand business in Europe. In May 2010, Groupon picked up Berlin-based CityDeal, a Groupon clone that’s posting growth that far outstrips the already astronomical rate at the acquiring company. CityDeal wasn’t even a year old when Groupon scooped it up, although it managed to generate approximately $450m in annualized revenue in 2010. For comparison, in its first year of existence, Groupon posted $30m in sales.

Groupon has since followed up the CityDeal acquisition with about a dozen other small deal-a-day sites across the globe. However, CityDeal remains the foundation for Groupon’s international operations, a business that is growing faster and has a higher gross margin than Groupon’s original operations in North America. Groupon now gets more revenue from outside its home country than from inside, which is an almost unheard of rate of internationalization for a three-year-old startup.

Given the contribution that CityDeal is making to Groupon’s financials, it’s worth remembering that Groupon only paid $125m in stock for the acquisition. Another way to look at it is that Groupon gave away about 10% of the equity of the company (roughly 41 million shares) for a company that now accounts for more than half its business. Of course, CityDeal’s owners took their payment in equity, so they will undoubtedly see their shares soar on the public market – far above the roughly $1bn valuation Groupon had when it acquired their company. (Valuations of around $20bn for Groupon on the public market are being kicked around right now.) As we think about that deal, it strikes us as a fitting structure for Groupon to use, in that the true value isn’t realized at the time of purchase, but at the point of redemption.

Heyday in May for M&A

Brenon Daly

Contact: Brenon Daly

This year opened with M&A spending in both January and February trickling along at the low levels it had been since the final months of 2010 – roughly $12-13bn each month. But then, the trickle turned into a flood. (Or at least the closest we’ve had to an M&A flood since the credit crisis.) March set a post-recession record for the value of announced transactions, with the activity staying steady in both April and now May.

The spending total for the just-completed month of May came in at $25bn. That basically matches the total for April, and is twice the monthly level we had been tallying since September 2010. (The record spending in March of $64bn came largely from AT&T’s proposed $39bn purchase of T-Mobile USA, the biggest telco acquisition in a half-decade.) Although smaller than Ma Bell’s move, big deals also helped boost spending totals in May, with two of the four largest tech acquisitions of 2011 announced in the month.

Altogether, M&A spending through the first five months of 2011 has hit a post-recession record of $137bn, putting the year on track for about $330bn in deal value for all of 2011. If we do hit that level, it will actually exceed the full-year totals for the two previous years combined. Spending on tech deals in recession-wracked 2009 totaled just $147bn, and spending only inched up a bit to $172bn in 2010.

2011 M&A activity, monthly

Period Deal volume Deal value, $bn
Jan. 322 $12bn
Feb. 285 $10bn
March 301 $64bn
April 283 $26bn
May 310 $25bn

Source: The 451 M&A KnowledgeBase

Flips and flops for PE shops

Brenon Daly

Contact: Brenon Daly

There are flips that fly, and flips that flop. Consider the two recent exits by private-equity (PE)-owned companies Skype Technologies and Freescale Semiconductor. One deal basically quadrupled the price of the portfolio company, while the other company is still lingering at a value of less than half its original purchase price. Granted, that ‘headline’ calculation misses some of the nuances of the holdings and their returns to the PE shops, but it’s nonetheless a solid reminder that deals need to be done with a focus on the ‘demand’ side of the exit.

For Skype’s PE ownership of Silver Lake Partners, Index Ventures and Andreessen Horowitz, the $8.5bn all-cash sale to Microsoft came less than two years after the consortium carved the VoIP provider out of eBay for just $2bn. The deal stands as the largest ever purchase by Microsoft, and the double-digit price-to-sales valuation suggests Redmond had to reach deep to take Skype off the board. Skype had filed to go public, but was also rumored to have attracted interest from Google as a possible buyer.

On the other hand, there wasn’t much demand for Freescale, which was coming public after undergoing the largest tech LBO in history. Freescale priced its recent IPO some 20% below the bottom end of its expected range. That had to be a painful concession for the PE owners of the company: Blackstone Group, Carlyle Group, Permira Funds and Texas Pacific Group. The club paid $17.6bn in mid-2006 for the semiconductor maker, loading up the company with billions in debt just as the market tanked. Freescale, which still carts around about $7.5bn in debt, has lower sales now than when it was taken private four years ago.

A tale of two e-discovery deals

Brenon Daly

Contact: Nick Patience

Last week was more or less bookended with two acquisitions in the e-discovery market, with Autonomy Corp picking up Iron Mountain’s digital assets on Monday and Symantec buying Clearwell Systems on Thursday. Autonomy and Symantec share a market but little else between them. Both are experienced acquirers – having made, collectively, 50 deals over the past decade – but each company chooses its targets and executes acquisitions in very different ways.

Autonomy often buys rivals simply to remove them from the market. Or it inks deals to obtain customer bases or move into adjacent sectors, and it often swoops in on companies at the last minute (as it did with Zantaz in 2007). The purchase of Iron Mountain’s divested business has all four of those characteristics. Iron Mountain was a direct rival in the e-discovery and archiving segments, while it also provided a backup and recovery business, which is a new area for Autonomy. The buyer also netted 6,000 customers, although there is some overlap. Autonomy took out Verity back in 2005 to remove a competitor and picked up Zantaz to get into the archiving space. The vendor is known for being aggressive in integrating companies, which often leads to a lot of people quickly moving on after being acquired, and we expect both people and products to be removed rapidly here.

Symantec’s M&A strategy is still somewhat shaped by its misguided attempt to add storage to its core security offering with the acquisition of Veritas in 2004. (That deal remains Big Yellow’s largest-ever purchase, accounting for more than half of the company’s entire M&A spending.) Of course, that transaction happened more than a half-decade ago and a different management team was heading the company.

Still, that experience – along with the constant reminders about the misstep from Symantec’s large shareholders – appears to have made the company more considered in its approach. For example, it had been working with Clearwell in the field as well as at the product development level for more than two years before the deal. However, we don’t think Big Yellow could have waited much longer to add some key e-discovery capabilities to boost its market-leading (but aging) Enterprise Vault franchise. We suspect that is why Symantec paid such a high premium for Clearwell, valuing the e-discovery provider at 7 times sales – more than twice the multiple Autonomy paid in its e-discovery purchase.

Clearwell had been on a growth tear since its formation at the end of 2004 and the firm helped define the e-discovery space, starting with early case assessment and then systematically moving into other segments of the e-discovery process. We get the feeling that management may have wished to have waited another year or so before being bought. We think they would have relished the chance to turn Clearwell into something substantial and possibly take it public; the fact that no bankers were used on either side indicates that Clearwell was not actively shopping itself around. But some offers are just too good to turn down.

Citrix targets SMBs with Kaviza

Ben Kolada

Contact: Ben Kolada

Broadening its enterprise VDI portfolio to the SMB segment, Citrix has acquired Kaviza, a startup offering VDI-in-a-box technology to SMBs. The move follows an initial Citrix investment announced in April 2010, and brings Kaviza fully under its fold. Though Citrix already had an enterprise desktop virtualization product – XenDesktop – the company was missing an SMB mass-market offering. This acquisition fills that gap and, with the backing of Citrix’s marketing muscle, Kaviza’s technology should see quick adoption. Indeed, the vendor has already made considerable progress on its own.

Kaviza’s success is in part attributed to its kMGR virtual appliance, which runs on a grid of commodity servers and manages virtual desktops. Once Kaviza is up and running, scaling up infrastructure shouldn’t require any more effort than dropping the virtual appliance into a new physical server since the appliance configures itself automatically.

The company’s VDI-in-a-box product has attracted a diverse client listing, and we understand that the average size of its deployments was growing. A German systems and service management vendor, Matrix42, chose Kaviza’s VDI-in-a-box to integrate with its IT-Commerce offering. Parker SSD Drives, a division of Parker Hannifin, deployed VDI-in-a-box to improve production time by reducing unscheduled downtime and time required for repair work. The University of Wisconsin-Madison College of Engineering uses the product to give its students remote access to teaching labs. And British Columbia’s Credit Counselling Society has also adopted Kaviza. We’ll have a full report on this transaction in tonight’s Daily 451.

BeyondTrust buys beyond its core market

Brenon Daly

Contact: Brenon Daly

Announcing its first acquisition since the September 2009 combination that created the current company, BeyondTrust recently picked up the assets of Lumigent. The deal adds Lumigent’s database monitoring to BeyondTrust’s core privileged identity management platform, so the purchase is a fairly logical step into an adjacent market. Terms weren’t disclosed, but we would guess that Lumigent didn’t sell for much more than the $4m of revenue that it generated last year. The company had been struggling in part because of a strategic misstep two years ago to go into the market for application governance, risk and compliance.

BeyondTrust paid for the Lumigent acquisition from its own treasury, even though it does have Insight Venture Partners as a backer. And the company is not done buying. We understand that it is likely to announce another two acquisitions this year. BeyondTrust can afford to do deals because it generates a fair amount of cash, running at a 35% EBITDA margin. The company recorded revenue of some $40m last year, up from $32m in 2009. Assuming those transactions go through, we gather that roughly half of the growth at BeyondTrust for 2011 would come organically, with the remaining half coming through M&A.

Heading in and out at Vector

Brenon Daly

Contact: Brenon Daly

Some eight months after the opening bid for RAE Systems was announced, it looks like Vector Capital continues to have the inside track in taking private the maker of gas detection monitors. The San Francisco-based buyout firm earlier this week raised its offer for RAE Systems to $2 per share, or roughly $120m. That marks the third time that Vector has bumped its bid in its competition with original bidder Battery Ventures.

Vector’s current offer adds some $25m to Battery’s initial price, and is more than twice the level where RAE Systems shares traded over the year leading up to the first announcement last September. Perhaps most crucially, RAE Systems executives, who own roughly 31% of outstanding shares, have thrown their support behind Vector by giving up shares for no consideration as well as rolling over a large portion of their equity holdings.

While Vector works to add RAE Systems to its portfolio, we understand that it may be looking to free up a spot there as well. Several market sources have indicated that Vector has retained Jefferies & Company to advise it on a possible sale of Corel. Running at more than $200m in sales, Corel has a number of products for graphics design, as well as WordPerfect and WinDVD, among other titles.

Vector has owned Corel since 2003, though it did sell a bit of the software company to the public in 2006 before buying back that chunk three years later. Given that Corel is a fairly large portfolio of mostly mature businesses, we suspect that the most likely buyer would be a fellow PE shop. However, the process is still in its early days, according to a source.