BMC adds to automation capabilities

by Brenon Daly

BMC Software hopes its latest purchase will make life easier for database administrators (DBAs) and systems operations. The management giant on Friday picked up longtime partner GridApp Systems, adding the startup’s database automation offering to its broader automation and management portfolio. GridApp automates tasks such as database provisioning and patching – mundane and time-consuming chores for DBAs, but ones that are critical for security and compliance reasons. Additionally, it enhances BMC’s full-stack automation capabilities.

The importance of this technology was highlighted (in part, at least) by another acquisition earlier this year. In late August, Hewlett-Packard reached for Stratavia, a startup that had begun life as a database management vendor but expanded into application-layer automation as well. (Pacific Crest Securities advised Stratavia, while GrowthPoint Technology Partners banked GridApp.) Even if the technology in the two deals doesn’t line up exactly, we understand that the valuations are nearly identical. Both GridApp and Stratavia, which were small, nonetheless garnered a 10 times multiple.

Laying out a dual track for Conerstone

Contact: Brenon Daly

If current IPO candidate Cornerstone OnDemand is looking for a company to model itself on – at least in terms of the offering and after-market trading – it could do a lot worse than SuccessFactors. Both vendors sell human capital management (HCM) software, and both sell it on a subscription basis. Further, both companies were relatively small (sub-$40m in revenue) and running deeply in the red when they put in their paperwork. Not that it has mattered in the case of SuccessFactors. Shares in the company have tripled from the offer price, giving it an eye-popping market valuation of $2.3bn.

Whether Cornerstone will enjoy an equally remarkable run as a public company remains to be seen. (The company, which initially filed in September, would probably be looking at pricing in the first half of next year.) But in a recent report, we wonder if Cornerstone will even make it to the Nasdaq at all. The reason? The M&A market for HCM vendors has been hot lately. Spending on deals in the market so far this year is running at three times the level of both 2008 and 2009. And valuations, for the most part, continue to come in at above-market multiples.

In the report, we speculate on two potential buyers: one that’s obvious (ADP) and one that’s more of a stretch (salesforce.com). Cornerstone has some traits that would clearly appeal to both, as well as some that make a trade sale to either would-be acquirer less likely. ADP, which has already purchased a half-dozen HCM providers, currently has a five-year reselling agreement with Cornerstone, and even holds rights to some warrants in the startup. However, a closer reading of Cornerstone’s prospectus indicates that the early returns from that reselling arrangement haven’t been encouraging, with the two sides feuding over whether or not ADP has hit the agreed-upon sales targets and is, therefore, entitled to warrants that could be worth several million dollars.

Unlike ADP, which has a demonstrated interest in and appetite for HCM deals, salesforce.com is a much more speculative buyer for Cornerstone. But it’s a pairing that is perhaps not as farfetched as it might seem. After all, salesforce.com has long said that it wants to be relevant to all employees at a business, not just to those in sales. Buying Cornerstone would immediately give salesforce.com a high-profile presence in the HCM market, opening up an opportunity that far exceeds its core CRM market. Of course, a major acquisition like this would go against the direction that salesforce.com has taken as an open, all-inclusive platform provider.

Tech M&A slumps toward the year-end

Contact: Brenon Daly

Tech M&A appears to be heading toward a quiet end to the year, with November marking the third straight month of declining spending on deals. The slump puts the value of deals announced in the just-completed month at about half the level we were recording in the months earlier this summer. Overall, we tallied 252 deals worth $11.2bn. (And as a side note to the total, we would highlight the fact that the spending in November was highly concentrated. A trio of deals – EMC’s purchase of Isilon, the Novell buyout and Oracle’s reach for Art Technology Group – accounted for nearly half the value of all transactions announced last month.)

It’s not just that November slipped when compared to other months this year. The paltry $11.2bn in aggregate M&A value is just one-third the level recorded in November 2009, and is even lower than the total in November 2008, when the economy was in the grips of the worst economic recession in 70 years. In fact, spending for the just-completed November is coming in at about half the average level for the month over the past four years.

As to what this means for tech M&A in 2011, we’re turning to the people who will be striking the deals next year. In the next day or two, we’ll be sending out our annual survey for corporate development executives and tech investment bankers. The surveys cover forecasts for M&A activity, as well as valuations. Anyone interested in filling out the survey (a quick, painless and confidential process), just email me and I’ll send along the appropriate survey. For those who receive the survey in their inboxes soon, we would appreciate 5-10 minutes of your time to get your views on where the M&A market is heading next year.

3Leaf ends up at Huawei – but will it be staying there?

Contact: John Abbott

Six months ago, I/O virtualization startup 3Leaf Systems disappeared from our radar screens. A little digging around more recently revealed that key staff members had scattered. VP of marketing Shahin Kahn was now at ORION Marketing Group, a consulting firm, with other ex-Sun Microsystems colleagues. CEO B.V. Jagadeesh had turned up as CEO of Virtela Technology Services, a managed network, security and technology services company. In his company biography he revealed that 3Leaf had been sold in a ‘private transaction.’ The trail of clues led on to Bob Quinn, founder and CTO of 3Leaf, who could be traced (via his LinkedIn profile) to Chinese telecom equipment maker Huawei Technologies, where he was now acting as a consultant. We surmised, and later received confirmation, that Huawei was the new owner of 3Leaf’s technology.

Two weeks ago, Huawei submitted an application to CFIUS – the US government’s Committee on Foreign Investment in the United States – including its first public statement that it had acquired 3Leaf in May. No details emerged other than that only the intellectual property and 15 of the 50 employees had been obtained in a transaction worth around $2m. According to CFIUS, Huawei should have requested permission from the committee. Huawei said it regarded the deal as a patent sale and hiring exercise and so believed it didn’t need to clear it with CFIUS. In 2008, the company abandoned its bid for 3Com due to US security terms. Hewlett-Packard stepped in to acquire 3Com a year later. More recently, Huawei has faced opposition to a proposed equipment-supply partnership in the US with Sprint Nextel over security concerns.

Aside from all this, the deal is a sorry – and somewhat worrying – end for 3Leaf, which raised roughly $67m from VCs Alloy Ventures, Enterprise Partners Venture Capital and Storm Ventures, as well as money from strategic investors Intel and LSI. 3Leaf was working on what should be a hot sector, I/O virtualization, but perhaps it entered the market too early. Its first product, the V-8000, first shipped in May 2007, but used a somewhat proprietary approach due to the lack of standards at the time. The company effectively started all over again in 2009 with plans to build new technology for virtualizing CPU and memory resources across x86 server clusters. It was looking for deals from OEMs, although there were also plans to sell prepackaged versions based on SuperMicro servers. However, 3Leaf needed more money to fund the ongoing research, and those efforts appear to have been unsuccessful.

3Leaf looked promising when it was founded, but early technology decisions led it down a blind alley. There may be some value in its patents and certainly more in the experience of its engineers, but it seems unlikely that, if CFIUS forces Huawei to sell the assets it’s bought, there will be many takers. If one is found, it’s likely to be a major server vendor with networking pretensions such as HP or IBM, or an I/O and networking adapter specialist such as Emulex or QLogic. Meanwhile, other startups in closely related areas – including ScaleMP, NextIO, Numascale, RNA Networks, VirtenSys and Xsigo Systems – soldier on.

SAP’s ‘dilutive’ deal and larger M&A implications

by Brenon Daly, China Martens

The jury’s decision to order SAP to pay $1.3bn to Oracle for stealing software and support material stands as the largest award for the theft of IP in the software industry. (As one banker deadpanned: “I think the TomorrowNow acquisition is dilutive.”) But the implications of the three-week trial extend far beyond the monetary settlement, as whopping as it is. From our perspective, the key part of the courtroom drama has been just how deeply the pair has relied on M&A to radically overhaul their businesses.

A half-decade ago, SAP figured that one of the easiest ways to hurt Oracle was to spend $10m for TomorrowNow (TN). Back in January 2005, the rationale for the TN deal made sense: buy a way of potentially siphoning off some of the rich maintenance stream that Oracle collects for supporting its ERP and CRM software. That was a key concern for SAP at the time, because it was still primarily hawking rival ERP and CRM products. The German giant had largely stayed out of the M&A market, preferring just to acquire small pieces of technology.

That changed dramatically three years ago, when SAP reached for Business Objects – its first major move beyond its core market. It stretched even further this summer with the $5.8bn purchase of Sybase. That acquisition brought SAP into several emerging markets, including mobile applications and some very promising in-memory analytics technology. The deal also represented a long-term shot at Oracle, as SAP now has a database to sell against Oracle rather than simply standing back and watching most of its ERP and CRM software run on Oracle, which has roughly half the database market.

If anything, Oracle has changed itself even more dramatically since then through acquisitions. It certainly has done a lot of them, announcing some 66 deals valued at a total of more than $30bn since SAP announced its tiny pickup of TN. Oracle has consolidated broad swaths of the software industry, including CRM, product lifecycle management, middleware, content management, as well as making a push into a handful of key vertical markets. Add to that Oracle is now in the hardware business, selling servers and storage along with other new businesses it picked up with its purchase of Sun Microsystems.

A severe case of buyer’s remorse for SAP

Contact: China Martens

Hindsight is a wonderful thing. Would SAP still have gone ahead with the $10m January 2005 purchase of fledgling third-party apps support player TomorrowNow (TN) had it had any inkling then of the financial cost more than five years later (a $1.3bn payout to Oracle and a ton of legal fees), as well as the dent to its previous sterling reputation? TN was always a loss-making business for SAP and at its height attracted less than 400 customers, a tiny proportion of the tens of thousands of Oracle apps customers.

SAP had been hoping to only have to pay out $40m over the intellectual property theft case that Oracle initiated against its bitter ERP and CRM foe and its TN business back in March 2007. Oracle alleged that TN, with SAP’s knowledge, had engaged in ‘massive theft’ of its software and related support materials through a series of illegal downloads with TN staff using customer passwords to access Oracle’s technical support websites for its JD Edwards, PeopleSoft and Siebel families of ERP and CRM apps. TN had then allegedly used the stolen materials to support its customers, offering them support at 50% less than Oracle’s rates.

More recently, SAP set aside $120m, but had in no sense been prepared that the jury would find so strongly in favor of Oracle, which had been looking for $1.7bn or more. SAP is set to appeal and ‘pursue all its options’ to reduce the award. This whole saga is far from ended – already, it’s been the stuff of Silicon Valley soap operas, with Oracle CEO Larry Ellison speaking out against new Hewlett-Packard CEO Leo Apotheker, a former CEO of SAP, and failing to serve a subpoena on him in a bizarre take on the video game Where in the World Is Carmen Sandiego?

Over the course of the case, Oracle had sought to continually expand the scope of the lawsuit, while SAP had tried to limit its focus. A few months into legal proceedings, SAP had admitted to some inappropriate downloads of Oracle material at TN, but shortly before the trial began, it decided not to contest contributory infringement, effectively contradicting earlier assertions that SAP executives didn’t have knowledge about what was going at TN.

The jury decision in favor of Oracle could well have a chilling effect on the remaining third-party support market. It’s one that never took off to the degree that its advocates had been expecting. In January, Oracle filed suit against the leading third-party support vendor, Rimini Street, which is headed by a cofounder of TomorrowNow. The suit was very similar in tone and scope to the TN one, but went into less specifics. It’s going to be interesting to see what happens now, since Rimini Street has been gearing up for a legal battle of this sort for some time.

Much has changed since SAP bought TomorrowNow, a unit it put up for sale, and, after finding no buyers, shuttered in October 2008. The move was triggered by Oracle’s multibillion-dollar purchases of ERP and CRM players PeopleSoft and Siebel. The widespread expectation was that Oracle would push those acquired customer bases to adopt its own E-Business Suite apps, but there was no large user exodus and Oracle has delivered new versions of its purchased apps. Indeed, Oracle has also tempered its big push around a new generation of apps, dubbed Fusion, with the initial release due next year.

So, customers in general are under much less pressure to migrate from the apps they’re currently using. At the same time, those same users are facing increased maintenance fees, which are a steady revenue source for both Oracle and SAP. It’s effectively at present in both companies’ interests to have no third-party apps support market. It will be interesting to see whether each of them revisits the concept to be one where they could have some revenue involvement. Over time, each player will face having to support a wider and wider variety of apps, versions and deployments, and they may find that taxing on their resources and therefore not as lucrative as in the past. Both companies are keenly aware of the gradual wearing-away impact of the SaaS apps market, where maintenance fees are substantially less or are factored into the cost of per-user, per-month subscriptions.

Buyouts are back

Contact:  Brenon Daly

The pending take-private of Novell underscores just how much private equity (PE) activity has rebounded since the Credit Crisis nearly shut down tech buyouts. The $2.2bn purchase of infrastructure software and SUSE Linux vendor Novell stands as the seventh PE tech deal so far this year valued at more than $1bn. That’s up from five big-ticket transactions in all of last year and only four in 2008.

What’s behind the buyout boom? The reopened debt market has allowed PE shops to make bigger bets once again. Consider this: With still more than a month left to go in 2010, PE firms have already tallied 264 deals valued at $30.2bn. The spending level is 50% higher than in all of 2009 and tops 2008, as well.

Also adding to the spending totals is the fact that targets are getting richer valuations. We’ve seen a trio of large leveraged buyouts (LBOs) go through this year with enterprise values of 4 times sales or even higher. However, that’s not the case with the latest LBO for Novell. Cash-rich Novell is garnering an enterprise value of $1.2bn, or just 1.5 times sales. Still, Novell’s LBO price is about 50% higher than where the company was valued at the start of the year.

PE Activity

Year Deal volume Deal value
YTD 2010 264 $30.2bn
2009 301 $19.7bn
2008 249 $24.8bn
2007 305 $118.4bn

Source: The 451 M&A KnowledgeBase

Not pretty, but it’s done at Novell

Contact: Brenon Daly

After holding out for more than eight months, Novell finally accepted on Monday a $2.2bn buyout offer from private equity-backed Attachmate. From the outside, it looks like a case where the buyer – or maybe more accurately, the hedge fund that put the company in play – simply wore down Novell. Under terms, Attachmate will hand over $6.10 in cash per share, or roughly $2.2bn, for Novell.

Yet if we step back and look at the offer, we can’t help but notice that the company is now embracing a bid that only values it slightly more than the original offer that put it in play. For the record, Novell’s board said three weeks after receiving the unsolicited bid from gadfly investor Elliott Associates that the offer of $5.75 for each share ‘undervalues’ the company and its prospects.

Apparently, Elliott’s opening bid wasn’t all that lowball because the company is selling for just 6% more than the offer that ‘undervalued’ it. We would also mention that Novell traded above the $6.10 bid several times over the summer, albeit on pure speculation. (JP Morgan Securities advised Novell, while Credit Suisse Securities and RBC Capital Markets worked for Attachmate.) The deal is expected to close in the first quarter of 2011, pending shareholder approval.

To be fair, the fact that Novell’s board got shareholders even a slight bump above the original offer should be viewed as a sell-side accomplishment. After all, Novell is a hoary, mixed-bag of businesses, with each unit attracting specific suitors. All of that made for an undoubtedly complicated process, with multiple permutations on bidders and bidding teams, as we understand it. (Companies we heard that may have taken a serious look at some point at Novell – or at least some of its businesses – include VMware and Oracle, among others.) Indeed, as part of the transaction, Microsoft will be acquiring a sprawling portfolio of 882 patents from Novell for $450m.

And beyond all of the complications around matchmaking is the fundamental fact that Novell just isn’t that attractive, regardless of whatever business we look at inside the company. Each component of its revenue (license, maintenance/subscription, services) has dropped so far this year, which is part of the reason why Novell has come up short of Wall Street expectations every quarter this year. Overall, sales have dropped 6% in 2010, and current projections call for Novell’s revenue to decline next year, too. So as we look at it, the board probably did a fair job to get Novell valued at $1.2bn (net of cash), which works out to basically 1.5 times sales. Novell shareholders will now have their say on the outcome of the more than eight-month process.

Ariba ‘mines’ for its latest deal

Contact: Brenon Daly

After three years out of the market, Ariba returned to M&A on Thursday with the $150m purchase of Quadrem. Both the current deal and the previous one help bolster the supply-chain vendor’s offering in new markets. In the case of Procuri, which was acquired in September 2007, Ariba picked up a company that was targeting small businesses. With its latest transaction, Ariba adds an offering geared for corporate giants, specifically some of the largest mining companies on earth. It also gets further into markets outside the US.

Quadrem was founded 10 years ago, and is still majority owned by a quartet of multinational mining giants (BHP Billiton, Anglo American, Rio Tinto and Vale SA). While sales to mining companies accounted for essentially all of Quadrem’s revenue in its early days, the vendor diversified into other industries in recent years. Currently, mining generates about half of Quadrem’s revenue, with the other half coming from other industries such as oil and gas as well as manufacturing.

Under terms of the deal, Quadrem’s four principal companies have extra incentive to keep using Quadrem even after the sale to Ariba closes, which is expected by next March. The reason: Ariba has held back $25m in payment and will kick in another $25m to the four companies as long as they are still using the network three years from now. Ariba says it expects to pay out the full amount. (Morgan Stanley advised Ariba on its purchase.)

Assuming that Ariba does indeed hand over the full $150m, the transaction would value Quadrem a smidge above two times this year’s projected sales of about $70m. For its part, Ariba trades at more than twice that valuation. It currently garners a market cap of about $1.7bn, compared to projected sales for calendar 2010 of about $370m. Incidentally, since Ariba last announced an acquisition three years ago, its shares have basically doubled while the Nasdaq has flatlined.

Exits lead up and down for General Catalyst

Contact: Brenon Daly

Talk about a mixed pair of exits. Venture firm General Catalyst Partners is faced with an unusual situation of the sale of one portfolio company almost undoubtedly slashing the valuation of another portfolio company that just filed for an IPO. The trade sale could even derail the offering, although that’s probably not likely.

The specifics: Boston-based General Catalyst (and more specifically, partner Joel Cutler) has backed both ITA Software, a maker of flight search tools, and Kayak.com, an online travel site. In July, ITA agreed to a $700m sale to Google (although the close of the deal has been hung up by concerns over the search giant potentially having too much influence in the flight search market). And then just this week, Kayak.com put in its paperwork to go public. General Catalyst is the single largest owner of Kayak.com, holding about 30% of the equity.

The rub in the two exits comes because Kayak.com relies heavily on ITA for sending business its way. (According to the prospectus, ITA has accounted for 42% of airfare query results so far this year.) Of course, Google would have every reason not to continue to send that search traffic to Kayak.com if the ITA purchase goes through. So for General Catalyst, it would be nice to pocket the proceeds from a $700m sale of ITA, but probably not if it comes at the cost of Kayak.com’s valuation.