Category: M&A

Multiples match on Lawson and Epicor

Brenon Daly

Contact: Brenon Daly

If nothing else, we now know the clearing price for ‘vintage’ ERP companies. (Or more accurately said, we know the proposed clearing price.) That’s at least one conclusion we can draw from the highly unusual situation where there are two deals going on simultaneously for two of the industry’s larger players, Epicor Software and Lawson Software. The two planned acquisitions – representing, collectively, $2.8bn of spending – line up almost exactly in several key metrics.

The numbers: the equity value of Apax’s offer for Epicor is $976m, with an enterprise value (EV) of $1.1bn. On an EV basis, that works out to about 2.5 times trailing sales and roughly 5x maintenance revenue. That mirrors very closely the takeout valuation that Lawson received in an unsolicited bid last month from PE-backed Infor Global Solutions, which it is currently reviewing. Lawson is being valued at 2.4x trailing sales and about 4.5x maintenance revenue. Even on an EV/EBITDA basis, the valuations are not all that dissimilar: Epicor garnering a 20.5x valuation, compared to Lawson’s 15.4x.

Apax goes double or nothing in big software bet

Brenon Daly

Contact: Brenon Daly

Apax Partners is going double or nothing in the latest addition to its software portfolio. The buyout firm plans to spend a total of $2bn to put together a pair of old-line ERP vendors, Epicor Software and Activant Solutions. And it is very much a ‘paired’ deal. In fact, according to terms, Apax closing its Activant purchase is a precondition of its planned take-private of Epicor.

That said, neither Apax’s purchase of Activant from its current private equity (PE) owners nor the buyout of Epicor should present much of a problem to get closed this quarter. But it does underline the necessity of cost ‘synergies’ in a deal (or in this case, two) for a mature company. (We noted that fact in the very similar proposed take-private of Lawson Software.)

If the double-barreled deals go through (as we assume they will), it would mark the end of a two-and-a-half-year effort by Elliott Associates to get Epicor sold. The hedge fund accumulated a 10% stake in Epicor in 2008 and then floated an offer of $9.50 for each remaining share of Epicor. It later trimmed that to $7.50 per share as the software company’s outlook deteriorated. (Epicor’s total revenue dropped 16% in 2009, and sales in 2011, while expected to increase, are still forecasted to come in below the level of 2008.) Apax is set to pay $12.50 per share for Epicor – an offer that Elliot has signed off on.

EMC bolsters security portfolio with NetWitness

Brenon Daly1 Comment

Contact: Brenon Daly, Josh Corman

Announcing its first deal in almost five months, EMC moved to bolster its security management portfolio by picking up fast-growing NetWitness. The purchase adds the rich network data and powerful analysis capabilities of the NetWitness NextGen platform, which is a bit like a TiVo for network traffic – capturing, indexing and storing massive amounts of network traffic. From a financial point of view, it is EMC’s first significant security acquisition since buying RSA Security in mid-2006.

In fact, we would estimate that the price of NetWitness tops EMC’s spending, collectively, on the four bolt-on acquisitions it has made to RSA since the $2.1bn deal. According to our understanding, NetWitness more than doubled revenue to about $45m in 2010. Given the growth rate and premium customer list NetWitness had assembled, we have no trouble believing market speculation that EMC paid $450-500m for NetWitness. A double-digit multiple isn’t out of whack for a fast-growing startup that has strategic value to EMC. We understand, for instance, that last summer EMC paid just shy of $400m for Greenplum, a data-warehousing startup that was clipping along at just under $30m in sales.

Tech M&A spending hits post-recession high

Brenon Daly

Contact: Brenon Daly

Lifted by AT&T’s massive consolidation play, tech M&A spending in the just-closed first quarter hit a post-recession record of $84bn – one-third more than the previous high-water mark of $62bn set in Q2 2010. Additionally, the number of transactions in the just-completed first quarter (881) also set a new record. (See our full report on the first-quarter activity.)

And yet even without the landmark telecom deal, Q1 deal flow was surprisingly strong, particularly in March. Excluding AT&T’s planned purchase of T-Mobile USA, the quarterly spending total was higher than both the preceding Q4 2010 and the year-earlier Q1 2010. Most of that, however, was due to a flurry of activity in March, which saw spending at more than twice the monthly rate of the previous half-year and the highest level since last summer. (Again, that’s backing out the $39bn that AT&T is set to spend on T-Mobile USA, a deal that was announced on March 21.)

As the gigantic telecom transaction illustrates, M&A is an inherently lumpy business. So projecting annual totals from a single quarter’s activity doesn’t necessarily make for a reliable forecast. Nonetheless, we would note that the frenetic start to 2011 puts it on track for nearly $340bn in spending for the year. If it comes in at roughly that level, it would mark the highest annual spending total in four years and would not be too far from the level in 2005, just before tech M&A set off on a two-year record run.

Recent quarterly deal flow

Period Deal volume Deal value
Q1 2011 881 $84bn
Q4 2010 775 $37bn
Q3 2010 768 $46bn
Q2 2010 773 $62bn
Q1 2010 847 $30bn

Source: The 451 M&A KnowledgeBase

Lawson: silence, suitors and synergy

Brenon Daly

Contact: Brenon Daly

If Lawson Software had held its scheduled call later this afternoon to discuss its third-quarter earnings report, we suspect that attendance would have been a bit higher than usual. Instead, the old-line ERP vendor scrapped it, citing the two-week-old unsolicited offer from industry consolidator Infor Global Solutions. (Those sorts of things tend to happen to companies that count Carl Icahn as their largest shareholder.) Lawson, advised by Barclays Capital, has said only that it is reviewing the proposal.

While Lawson’s silence is entirely understandable from a company that’s been put in play, it did nothing to dampen investor speculation that another suitor would show up. The stock, which has traded above the $11.25-per-share bid since it was launched, inched a little higher to $12.14 in Thursday afternoon activity. Lawson shares haven’t seen these levels since March 2002.

Perhaps inevitably, Oracle’s name has surfaced as a potential buyer. While Lawson isn’t particularly cheap, it’s also not particularly expensive. Its current market cap of $2bn works out to about 2.6 times projected sales of $770m for the current fiscal year and roughly 15x EBITDA. Another way to look at it: the market values Lawson at about 5x its maintenance revenue. (For comparison, Epicor Software trades at 1.7x sales and roughly 3x maintenance revenue.)

For buyout shops, Lawson’s valuation is already at the upper end of the range that could still deliver a decent financial return, we would think. Of course, Infor is owned by a private equity firm, Golden Gate Capital. But in terms of bidding, Infor is more of a strategic buyer than a financial one when it comes to ‘synergies.’ After all, privately held Infor already has the corporate infrastructure in place to run a $2bn business, roughly three times the size of Lawson.

The ever-increasing appetite of salesforce.com

Brenon Daly

Contact: Brenon Daly

Salesforce.com just keeps taking bigger bites. The company announced Wednesday that it will hand over $326m ($276m in cash and $50m in stock) for social-media monitoring company Radian6. Not only is it salesforce.com’s highest-priced acquisition, it also likely brings more revenue than any other deal the company has done, at least based on our estimates for previous transactions and the company’s guidance for Radian6. Salesforce.com indicated that the Canadian startup would contribute about $50m in sales during the current fiscal year, which is about two months old.

The purchase, which is expected to close by July, also puts an exclamation point on the changes in dealmaking at salesforce.com. The 11-year-old SaaS pioneer stayed out of the M&A market for the first half of its corporate life. And even when it started doing deals in 2006, the first half-dozen or so acquisitions were all small, valued in the low tens of millions of dollars. Salesforce.com only started announcing major purchases last year, with its $142m reach for Jigsaw Data followed by its $249m takeout of Heroku.

As sizeable as the deal is inside saleforce.com, it also looms pretty large inside the burgeoning social CRM market. Consider this: at roughly one-third of a billion dollars, salesforce.com’s pickup of Radian6 is more than 50 times larger than the acquisition of another social CRM startup just last week. Privately held Meltwater Group paid just $6m for JitterJam to bolster its social CRM offering, which the company hopes to be a $100m business within three years.

eBay bids high for GSI

Ben Kolada

Contact: Ben Kolada

In its largest deal in the past half-decade, eBay is set to acquire e-commerce vendor GSI Commerce for $2.4bn. The company hasn’t made such a move since September 2005, when it forked over $2.6bn for VoIP provider Skype. And while hindsight shows that eBay certainly overpaid for that property, on an equity value basis, this transaction actually carries the highest bid eBay has offered. (We would also note that this pending acquisition is the largest Internet deal since February 2008.)

Although the deal represents a fairly standard price-to-sales valuation, it carries a hefty share price premium that makes the 40-day go-shopping clause more of a formality than anything else. The $29.25-per-share cash offer values GSI at 1.6 times its trailing sales, in line with other public takeovers, but it represents a premium of 51% over GSI’s closing share price on Friday and the highest price its shares have seen since July 2010. That’s more than twice the premiums eBay offered for Gmarket in April 2009 and Shopping.com in June 2005. The valuation is actually slightly higher when considering that eBay isn’t interested in the entire company. As per terms of the deal, which is expected to close in the third quarter, eBay will divest GSI’s licensed sports merchandise business and 70% of its ShopRunner and Rue La La assets to a newly formed company led by GSI founder and CEO Michael Rubin.

Buying a new look

Brenon Daly

Contact: Brenon Daly

In any business, it’s tough to take the old and make it new. In fact, that sometimes requires a little outside help. That came through in Walgreens’ purchase Thursday of Drugstore.com. After all, here is Walgreens – a 110-year-old chain that’s the largest drugstore in the US – saying it can’t necessarily get its online business where it wants it to be on its own. So the company is set to hand over $429m in cash for Drugstore.com to bolster its online sales.

As an aside, the deal caps a run by Drugstore.com that in many ways embodies the whole Internet Bubble. It was a hot IPO back in 1999, just five months after opening its virtual doors. Sales were still in the single digits of millions of dollars when it went public. Of course, investors couldn’t get enough of the freshly minted equity – at least not until the Bubble burst in 2000.

After that, shares never again traded in the double digits. Walgreens is set to pay $3.80 for each share of Drugstore.com, more than twice the market said the stock was worth the day before the deal was announced. The kicker on Drugstore.com is that the company was probably more highly valued when it was a tiny startup in a frothy era than today, when it is a business generating about a half-billion dollars in sales.

Actually, this is the second transaction in a month that has seen an Old Economy company pay up to join the New Economy. In mid-February, Nordstrom threw $180m at HauteLook to get into the private-sale marketplace. (Terms also include a potential $90m earnout for HauteLook.) To understand the motivation, consider the relative age of the two sides in the transaction: Nordstrom opened its first store in 1901, while HauteLook went live (in the digital parlance) only in 2007.

Oracle has gone silent

Brenon Daly

Contact: Brenon Daly

While investors will be tuning in for Oracle’s Q3 report after the market’s close today, we can’t help noting that there hasn’t been much news from the consolidator recently. It has yet to announce a deal in 2011, an uncharacteristic dry spell for a company that averaged an acquisition every six weeks in each of the past two years. In Q1 2010, Oracle announced three transactions and even in the recession-wracked Q1 2009, the software giant announced a pair of deals – but nothing so far this year.

In fact, Oracle has been out of the market since it spent $1bn on Art Technology Group in early November, nearly five months ago. And it’s not just Oracle that’s currently on the M&A sidelines. Fellow big-name buyers such as Microsoft, Symantec, EMC and Nokia have all yet to open their accounts in 2011. Even serial shopper IBM was also on that list until earlier this week, when it announced its purchase of Tririga

AT&T does Sprint a favor

Ben Kolada

Contact: Ben Kolada

If the rumors that Sprint was eyeing T-Mobile USA were actually true, then AT&T did its competitor a big favor by taking in the divested business. From our view, T-Mobile would have been a bigger bite, both financially and operationally, than Sprint could have swallowed. The transaction would likely have introduced a whole new set of tricky integration problems just at a time when Sprint is (finally) emerging from the set of problems it took on when it did its last big deal, the $39bn purchase of Nextel in late 2004. (Sprint shares have lost 80% of their value since that ill-fated acquisition.)

Sprint is already the only national carrier managing three different networks (CDMA, iDEN and WiMax), and the addition of T-Mobile would have added a fourth, bringing additional cost and complexity to the carrier’s operations. And while Sprint is moving back into the black, T-Mobile’s financial performance wouldn’t necessarily have helped that effort. (Don’t forget that the Deutsche Telekom subsidiary has long been a laggard, in terms of margins and subscriber growth, and is being divested for less than it was acquired.) While Sprint is adding subscribers and is finally growing revenue (2010 marked the first time in four years that it grew its top line), subscriber and revenue growth at T-Mobile have been flat.

Instead of T-Mobile, several of the remaining cellular properties in the US would fit better, both technologically and financially, with Sprint. While Sprint’s share price plummeted on AT&T’s news, stocks of regional cellular carriers such as MetroPCS and Leap Wireless soared on buyout speculation. Like Sprint, both are CDMA network operators, and both would provide Sprint with growing revenue and subscriber bases. And both companies are still within Sprint’s price range.

Even with M&A speculation inflating their valuations, MetroPCS and Leap currently sport $5.5bn and $1.1bn market caps, respectively. A cash-and-stock deal similar to AT&T’s T-Mobile acquisition could actually put both under Sprint’s ownership, since Sprint is sitting on $5.5bn in cash and short-term investments. And Sprint actually seems the most likely acquirer for these companies, even though Verizon is widely speculated to react to AT&T’s announcement with a deal of its own. Given the scrutiny that AT&T’s pending purchase of T-Mobile is expected to receive, we doubt that Verizon, currently the nation’s largest cellular carrier, could make a deal without regulators saying they’ve had enough.