Category: M&A

SMSC picks up the final portion of once-mighty Conexant

Contact: John Abbott

The agreement this week by New York City-based analog and mixed-signal chip vendor SMSC (aka Standard Microsystems) to acquire Conexant Systems for $284m in cash and stock marks the end of a drawn-out breakup process for the target company. Conexant was formed in January 1999 as a spinoff of the legendary Rockwell Semiconductor Systems, best known for its pioneering desktop calculator chips in the 1960s and modem chips in the 1990s. Rapidly hitting hard times, Conexant was subsequently carved up through a series of smaller spinoffs.

The foundry business was the first to go, as Jazz Semiconductor in March 2002 (Jazz later merged with National Semiconductor spinoff Tower Semiconductor in 2008 to form TowerJazz). The divestment of radio frequency and mobile chips to Skyworks Solutions was completed in June 2002, followed by the sale of the communications chips business to Mindspeed Technologies in June 2003 – both are still active. Most of the rest went to NXP Semiconductors (broadband media processors for $110m in April 2008), Coppergate Communications (home networking, value undisclosed, May 2008) and Ikanos Communications (broadband access products for $54m in April 2009). SMSC now takes on the final vestiges, consisting of silicon platforms for imaging, audio, fax, embedded modem and video-surveillance applications. The market’s negative reaction to the deal reflects a lack of excitement in these remaindered industry sectors.

However, the fit isn’t without some logic. SMSC’s primary business comes from mixed-signal connectivity chips aimed at personal computers, automotive and portable devices, including USB and Ethernet system on chips. The Conexant IP will broaden SMSC’s activities in the computing, consumer, industrial and automotive sectors; strengthen its relationships with some key joint customers; and boost its analog/mixed-signal R&D team to more than 900 engineers. SMSC has agreed to pay $98m in cash and will issue 2.9 million to 3.6 million shares when the deal closes some time during the first half of calendar 2011. It also takes on $86m in debt. Both boards have approved the transaction.

Founded in 1971, SMSC only became a significant industry force after buying Western Digital’s Ethernet and Token Ring LAN chip business in 1991, paying $33m. The company has been showing healthy organic growth of late, while also seeking opportunities to acquire: Conexant is its fifth deal since July 2009, and by far the largest in its history, adding 600 staff (230 of them in Asia) to its current headcount of just over 900. Combined trailing 12-month revenue would have reached $632m. However, synergies resulting in cost savings of up to $10m are forecast by the fourth quarter of 2012, so cuts appear inevitable.

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SMSC picks up the final portion of once-mighty Conexant

-by John Abbott

The agreement this week by New York City-based analog and mixed-signal chip vendor SMSC (aka Standard Microsystems) to acquire Conexant Systems for $284m in cash and stock marks the end of a drawn-out breakup process for the target company. Conexant was formed in January 1999 as a spinoff of the legendary Rockwell Semiconductor Systems, best known for its pioneering desktop calculator chips in the 1960s and modem chips in the 1990s. Rapidly hitting hard times, Conexant was subsequently carved up through a series of smaller spinoffs.

The foundry business was the first to go, as Jazz Semiconductor in March 2002 (Jazz later merged with National Semiconductor spinoff Tower Semiconductor in 2008 to form TowerJazz). The divestment of radio frequency and mobile chips to Skyworks Solutions was completed in June 2002, followed by the sale of the communications chips business to Mindspeed Technologies in June 2003 – both are still active. Most of the rest went to NXP Semiconductors (broadband media processors for $110m in April 2008), Coppergate Communications (home networking, value undisclosed, May 2008) and Ikanos Communications (broadband access products for $54m in April 2009). SMSC now takes on the final vestiges, consisting of silicon platforms for imaging, audio, fax, embedded modem and video-surveillance applications. The market’s negative reaction to the deal reflects a lack of excitement in these remaindered industry sectors.

However, the fit isn’t without some logic. SMSC’s primary business comes from mixed-signal connectivity chips aimed at personal computers, automotive and portable devices, including USB and Ethernet system on chips. The Conexant IP will broaden SMSC’s activities in the computing, consumer, industrial and automotive sectors; strengthen its relationships with some key joint customers; and boost its analog/mixed-signal R&D team to more than 900 engineers. SMSC has agreed to pay $98m in cash and will issue 2.9 million to 3.6 million shares when the deal closes some time during the first half of calendar 2011. It also takes on $86m in debt. Both boards have approved the transaction.

Founded in 1971, SMSC only became a significant industry force after buying Western Digital’s Ethernet and Token Ring LAN chip business in 1991, paying $33m. The company has been showing healthy organic growth of late, while also seeking opportunities to acquire: Conexant is its fifth deal since July 2009, and by far the largest in its history, adding 600 staff (230 of them in Asia) to its current headcount of just over 900. Combined trailing 12-month revenue would have reached $632m. However, synergies resulting in cost savings of up to $10m are forecast by the fourth quarter of 2012, so cuts appear inevitable.

More than just Chatter at salesforce.com

Ben Kolada

Contact: Ben Kolada, Kathleen Reidy

Fresh from closing its $249m acquisition of Ruby developer Heroku, salesforce.com recently announced, and closed, its purchase of Web-conferencing startup Dimdim for $31m. The Lowell, Massachusetts-based target provided a cloud-based open source Web-conferencing service for businesses, and with this deal salesforce.com now claims 60,000 Chatter users, though with its ‘freemium’ model we suspect that only a fraction of these are paying customers.

Salesforce.com paid $31m in cash for Dimdim, which had raised a total of $8.4m from venture investors Draper Richards, Index Ventures and Nexus Venture Partners. Per salesforce.com’s conference call, Dimdim has 75 employees spread throughout its offices in Lowell and Hyderabad, India. Although the target’s annual revenue wasn’t disclosed, we estimate that it closed 2010 with about $2m in revenue.

Like salesforce.com’s previous collaboration pickup – GroupSwim, in December 2009 – Dimdim’s services will be shut down, and its capabilities will be rolled into Chatter, salesforce.com’s social collaboration software service that first launched in 2009. As my colleague Kathleen Reidy notes (click here to see her full report on the acquisition), as evidenced by the almost immediate shutdown of the Dimdim service, salesforce.com isn’t interested in the pure Web-conferencing market. Salesforce.com will honor contracts with Dimdim’s existing customers, though these will not be eligible for renewal, and it has terminated Dimdim’s free service. Dimdim also had an open source distribution and while this is still available, it won’t see any further updates. Instead, Dimdim will provide features to Chatter, which is also incorporating semantic analysis technology from GroupSwim.

What’s ultimate destination for Ultimate Software?

Brenon Daly

Contact: Brenon Daly

After 20 years in business, Ultimate Software may be looking for a new owner. The human capital management (HCM) vendor is rumored to have retained Lazard to shop the company, market sources have told us. The bank will run a narrow process, likely approaching about a half-dozen possible buyers rather than running a full auction, the sources added.

The decision by Ultimate to test the market comes as deal flow in the HCM sector has hit a record level. In 2010, we tallied some $2.4bn in spending on deals, slightly eclipsing the previous record of $2.1bn in 2007, according to The 451 M&A KnowledgeBase. Valuations across the space have been soaring, and Ultimate is no exception. This time last year, shares of the Weston, Florida-based company were changing hands at about $30 each. Now, they’re at $50 – an all-time high. That gives Ultimate a market value of $1.25bn, roughly 4.6 times projected 2011 sales of $270m.

Much of the gain can be chalked up to the company’s decision a few years ago to switch from selling software licenses to a subscription model. (It’s a move that has proved incredibly lucrative for other old-line software companies, as well. Shares of Concur Technologies, which underwent a similar shift in sales model a few years ago, have quadrupled over the past five years and are now valued at $2.8bn.) Ultimate stopped selling new software licenses in April 2009 and recurring revenue (made up of both subscription and maintenance revenue) is now more than three-quarters of total sales.

Sourcefire’s risky bet to re-spark its M&A program

Brenon Daly

Contact: Brenon Daly

As deals go, Sourcefire’s first acquisition hardly set the world on fire (if you will). Back in August 2007, the open source security vendor picked up the open source ClamAV project. The deal only set Sourcefire back $3.5m, but not much has been heard from the project since the acquisition. Undeterred, Sourcefire stepped back into the M&A market on Wednesday with an even larger – and (potentially) much more significant – transaction.

Sourcefire is paying $17m in cash for Immunet, a cloud-based anti-malware provider. (Immunet could also pocket a $4m earnout, which depends on the company hitting some product milestones, as well as a smidge of Sourcefire equity.) It’s still early days for Immunet, which raised just one round of funding and only started generating revenue last year. (The company claims some 750,000 users, but we suspect that the vast majority of those would be using Immunet Protect, which is available for free.)

There’s always a risk when a company reaches for an early-stage startup like Immunet, which has yet to really prove itself commercially. That risk is somewhat mitigated, however, by the fact that the two companies had worked together for almost a year, and all of the Immunet employees, including the founders, will be joining Sourcefire.

But, as my colleague Andrew Hay notes in his report, the deal brings a much bigger risk: Can Sourcefire, which is primarily focused on network security with its well-known Snort product, step into the endpoint security market without a stumble? How will it fare in selling antivirus against giant rivals that generate more revenue each quarter than Sourcefire has in its entire history? Sourcefire has fought through some tough setbacks in its history, including a broken sale to Check Point Software and breaking issue in its IPO. Now, with Immunet, it needs to show that it can actually pull off an acquisition.

Qatalyst strikes again, but bigger

Brenon Daly

Contact: Brenon Daly

When Jason DiLullo joined Qatalyst Partners last April, the boutique firm announced that he would play a major role in expanding the firm into semiconductor deals. Indeed he did. Qatalyst is getting sole credit for advising Atheros Communications on its sale to Qualcomm, the largest chip acquisition in four years. (On the other side, Goldman Sachs and Barclays Capital advised Qualcomm.) With an equity value of $3.6bn, it is Qatalyst’s largest deal – by about $1bn, no less – since it opened its doors in March 2008.

The chip deal brings the total value of the 10 transactions that Qatalyst has worked on to more than $17bn. Of course, the firm is primarily known for its role in helping to consolidate the storage sector, working on the sales of Isilon Systems and 3PAR last year, as well as Data Domain in mid-2009. (All three of those companies were erased from the market at their highest-ever valuation.) Collectively, the equity value of those three storage deals is about $7bn – ‘only’ twice the amount of Qatalyst’s sole chip deal.

The IPO pipeline just got even drier

Brenon Daly

Contact: Brenon Daly

Scratch another company off the list of potential IPO candidates for 2011. Managed security services provider (MSSP) SecureWorks got snapped up by Dell on Tuesday for what we understand was a table-clearing bid. (Subscribers can see our full report on the transaction, including our estimated price for SecureWorks.)

The trade sale comes two years after the MSSP was putting the final touches on its prospectus. That offering, which got derailed when the Credit Crisis knocked the equity markets for a loop, was set to be led by Merrill Lynch and Deutsche Bank. (Merrill Lynch, which got picked up by Bank of America later in 2008, got the print on the sale.) We understand that SecureWorks was getting ready to dust off the prospectus, update the numbers and (finally) get it on file with the SEC later this year.

Instead, Dell moved quickly to secure the deal, which will serve as the foundation for its security offering. We gather that talks only really got going after Thanksgiving, going exclusive almost immediately. And Dell had to pay up for that. Of course, Dell could consider its pickup of SecureWorks a bargain, compared to the last dual-track company it acquired. Recall that Dell paid an eye-popping $1.4bn, or 10 times trailing sales, for EqualLogic back in November 2007. The storage vendor, which had formally put in its prospectus, generated almost exactly the same amount of revenue as SecureWorks.

Big is back (sort of)

Brenon Daly

Contact: Brenon Daly

The number of big-ticket deals in 2010 jumped by one-quarter from the level posted in each of the past two years, an indication that buyers are once again open to a bit more risk. We tallied 40 transactions valued at $1bn or more last year, up from 32 in 2009 and 33 in 2008. One of the reasons for the rise in 2010 – unlike the two previous years – is that the acquirers had to top a pretty bullish tech market to secure their deals. Companies including Isilon Systems, Netezza, ArcSight and 3PAR all got taken off the board last year at their highest-ever valuation.

Also unlike the two previous years, we had a number of ‘serial shoppers’ on the list. Hewlett-Packard inked three 10-digit deals in 2010, while IBM and Intel each closed two of the big transactions as well. And it wasn’t just strategic buyers. The Carlyle Group announced a pair of billion-dollar acquisitions – on back-to-back days, no less. Overall, buyout shops accounted for seven deals last year valued at more than $1bn, up from four in 2008 and five in 2009.

10-digit transactions

Year Number of deals worth $1bn+
2010 40
2009 32
2008 33
2007 79
2006 74
2005 70

Source: The 451 M&A KnowledgeBase

2010: not the year it could have been for tech M&A

Brenon Daly

Contact: Brenon Daly

Looking back on dealmaking in 2010, it strikes us that it wasn’t the year that it could have been. With the recession (officially) behind us and many tech companies’ stock prices and cash hoards hitting record levels, we might have thought M&A last year would rebound to pre-Credit Crisis levels. That wasn’t the case.

In 2010, we tallied some 3,200 transactions – a slight 7% increase over the number of deals in the recession-wracked years of 2008 and 2009. In the far more important measure of tech M&A spending, the $178bn in 2010 represented a substantial 21% jump from 2009 levels. But it’s just half the annual amount we saw from 2005-2008. (In fact, the spending in the second quarter of 2007 alone eclipsed the full-year total for 2010.)

Looking deeper at last year’s activity of some of the key tech corporate buyers, we begin to see a partial reason for the muted overall spending, at least compared to pre-Crisis years. Yes, stalwarts like IBM and Hewlett-Packard continued their shopping sprees in 2010. Collectively, that pair announced 23 transactions worth a total of $11.1bn. But other tech bellwethers weren’t so quick to sign deals last year.

Microsoft announced just two purchases in 2010. Symantec sat out the entire second half of 2010 – a period, we might note, that saw its largest rival, McAfee, get snapped up. Cisco Systems did fewer deals in 2010 than in 2009. Included in the list of 2009 transactions for the networking giant were a pair of $3bn acquisitions (Starent Networks and Tandberg), while the largest deal Cisco announced last year was the $99m pickup of CoreOptics.

And although Dell was in the news often for M&A last year, both on successful and unsuccessful transactions, its overall activity basically kept pace with recent years. However, the company’s landmark purchase of 2010 (the $960m acquisition of Compellent Technologies) only ranks as the third-largest deal Dell has made since it jump-started its M&A program in mid-2007.

Tech bankers see a bit more of everything in 2011

Brenon Daly

Contact: Brenon Daly

As we all know, banking is a cyclical business. And after a painfully sharp downturn in recent years, the business is swinging back. It looks to be swinging even higher in 2011, according to our annual survey of many of the top dealmakers. (See our full report on the results.) We would note, too, that the rebound is expected for both the tech M&A market as well as the tech banking industry itself.

Consider this: Four out of five tech investment bankers said their pipeline appears fuller now than it did a year ago, up from two-thirds of them who said the same thing in our previous year’s survey. If we flip it around, just one out of 20 bankers (7%) said the pipeline is drier than it was a year ago, down from one out of five (20%) who said the same thing in the previous survey. The recovery is even more pronounced when we consider that in our 2008 survey, more than half of the bankers said they had fewer mandates in the pipeline than they did the prior year.

Meanwhile, concerning the tech banking business itself, respondents indicated that their firms expect to be hiring more in the next six months. They also reported that deals were closing more quickly and fee rates on the transactions were actually ticking higher.

Teradata pays a tidy premium for Aprimo

Brenon Daly

Contact: Brenon Daly

Announcing its first major acquisition since it was spun off into a stand-alone company more than three years ago, Teradata said it will pay $525m in cash for Aprimo. The deal marks a significant bet by the data-warehousing giant on the application market. Specifically, Aprimo brings a marketing automation offering to run on top of Teradata’s existing business analytics offering. Aprimo products will continue to be marketed and sold under the company’s name once the transaction closes, which is expected in the first quarter.

According to a conference call discussing the acquisition, Aprimo is expected to generate about $80m in annual sales. (We understand that roughly $60m of that is recurring revenue.) That means Teradata is paying a healthy 6.5 times revenue for Aprimo. That’s slightly ahead of the valuation that IBM paid in its big marketing automation play four months ago. Big Blue handed over $523m in cash for Unica, valuing the publicly traded company at 4.8 times trailing revenue.

Part of Aprimo’s premium could likely be attributed to the fact that it was steadily moving its business from a license model to a subscription basis. In fact, Aprimo’s SaaS offering accounted for a majority of its revenue. IBM’s move was important in the Aprimo process, as we gather that Teradata and Aprimo started talking only after Big Blue had closed its acquisition.