Ulticom’s shareholders cash out

Contact: Brenon Daly

Cash is king. We got a reminder of that tried-and-true business adage when we were skimming the terms of Ulticom’s sale to buyout shop Platinum Equity earlier this week. While the pending take-private is hardly a regal outcome for shareholders of the telecom software provider, the structure of the deal helps them get a bit more back from the business than they would have otherwise.

According to terms of Tuesday’s buyout, Platinum will pay $2.33 for each of the roughly 11 million shares outstanding at Ulticom. That works out to about $26m of equity consideration for the company. Far more important, however, the buyout shop will hand back roughly $64m of Ulticom’s $77m in cash to shareholders. This is actually a rare case of a cash ‘rebate’ being pocketed by the existing owners of a business (shareholders) rather than the soon-to-be owners. The bid works out to an enterprise value for Ulticom of about $16m, for a business that was likely to do around $38m in revenue in the current fiscal year.

Further, this is actually the second time that Ulticom has parceled out its cash. A bit of background: Ulticom is majority owned by Comverse Technology. The scandal-tainted company acquired Ulticom in 1996, which then spun off a chunk in a public offering in April 2000. That offering – along with a secondary shortly afterward – gave Ulticom way more money than it could ever use. While the company was sitting on a mountain of cash, interest in it was muted because Ulticom had to restate several years worth of financial filings because of options grants and revenue recognition issues. Those concerns pretty much sank Ulticom’s M&A plans in 2008, when it was being advised by Jefferies & Company.

Last year, however, Ulticom got itself back together. It settled with the SEC, got relisted on the Nasdaq and even threw a bone to long-suffering shareholders, paying out $200m in cash through a dividend. (Part of the reason Ulticom emptied out its treasury, we suspect, is to make it more attractive to private equity firms, which wouldn’t have to write such a large check for the company.) The move paid off for Ulticom, not to mention its shareholders. Morgan Keegan Technology Group (the former Revolution Partners) advised Ulticom on the deal, which is expected to close by January

Is GeoLearning the next to go?

Contact: Brenon Daly

While the employment market may still be sluggish, the market for software that helps companies with their employees is bustling. We recently noted that both the number of deals and spending in the human capital management (HCM) market so far this year is rivaling the records set when the overall M&A market was much healthier. Add to that, there’s even an HCM vendor that’s eyeing the other exit: Cornerstone OnDemand filed to go public two weeks ago, one of the few tech companies that’s willing to brave the chilly IPO market.

As to what’s the next likely deal in the HCM market, recent indications have pointed toward a sale of GeoLearning. (We understand that the Des Moines, Iowa-based company has retained Raymond James & Associates to advise it on a process.) Founded in 1997 by current CEO Frank Russell, GeoLearning sells its learning management software (LMS) through both a hosted and on-demand model to more than 700 customers. In February 2008, GeoLearning took in its first and only institutional money – a $31m investment from Volition Capital, which was known as Fidelity Ventures at the time.

A little more than a month ago, fellow LMS startup Learn.com got snapped up by Taleo for $125m. Sources have indicated that ADP may have been the initial bidder for Learn.com, looking to add to the half-dozen HCM acquisitions the services giant has already done. We would expect ADP to at least look closely at GeoLearning. But from our perspective, the more likely acquirer for GeoLearning is SuccessFactors. The two companies have had an integrated offering on the market for more than four years, and continue as close partners. We gather that GeoLearning is slightly larger than Learn.com, which was running at about $30m in sales.

Zynga buys beyond Facebook

Contact: Jarrett Streebin

Zynga has become a serious collector of small to medium-sized game development studios, acquiring seven companies so far this year. Beyond just buying more titles, the company has used M&A to get into other markets. For instance, Zynga has expanded internationally with XPD Media in China, Dextrose in Germany and Unoh in Japan. With the latest purchase of Bonfire Studios, which was announced October 5, it goes beyond Facebook gaming altogether into console and PC gaming.

Founded in 2007, Zynga has grown from a small social games developer into the largest shop on the block. The San Francisco-based firm is the leading developer of Facebook games and makes its money by selling virtual goods in its games. (We looked more fully at the market for virtual goods in a recent Sector IQ.) Users can pay real cash to buy weapons for their mafia or crops for their farms. Things were going well until Facebook unveiled Facebook Credits earlier this year. There was even a standoff between Zynga and Facebook due to the 30% cut that Facebook takes. Eventually, Zynga gave in and signed an exclusivity agreement.

Still, we sense that the company learned a valuable lesson about being overly dependent on a platform that it doesn’t own. At least that’s how we might read the fact that six of Zynga’s past seven deals are in other areas of gaming. The diversification has seen Zynga broaden its international business with the acquisitions of Chinese firm XPD Media, German game engine developer Dextrose and Japanese social gaming company Unoh. And most recently, Zynga’s reach for Bonfire Studios added a startup that was founded by three gaming veterans with PC and console experience.

Internet infrastructure in Q3: a dip in deal volume

Contact: Ben Kolada

In the just-closed quarter, we noticed a slight dip in the number of announced deals. In fact, the deal volume has continued its slide ever since the industry hit its peak in the first quarter of 2010. That’s not to say that our readers should make like Equinix’s investors and run for the exit. True, deal volume did slide downward, but the brand names of the Internet infrastructure industry continued to make long-term investments.

The total number of transactions announced in the third quarter declined 13.5% from the second quarter and 27.3% from the first quarter of the year. However, we must note that Q1 deal volume was, in fact, artificially inflated somewhat as some deals that were put on hold during the worst part of the recession in 2009 were finally closed in Q4 2009 and the beginning of 2010 due to renewed optimism in the economy and the ability to once again access capital at reasonable rates.

Overall, the number of transactions is up year over year, with Q3 2010 yielding 23% more transactions than the year-ago period. In fact, the total number of deals announced in the first three quarters of this year has already topped the full-year total for 2009. Furthermore, well-established names in the Internet infrastructure sector, including Digital Realty Trust, Limelight Networks and TeleCity on the industry side and GI Partners, Sequoia Capital and Welsh, Carson, Anderson & Stowe on the investment side, just to name a few, came to the table in the third quarter. We’ll take a deeper look at Q3 deal volume in a report that will be included in tonight’s Daily 451 sendout.

Recent quarterly deal flow

Period Number of transactions Percent change from previous quarter
Q1 2009 12
Q2 2009 17 42%
Q3 2009 26 53%
Q4 2009 28 8%
Q1 2010 44 57%
Q2 2010 38 -14%
Q3 2010 32 -16%

Source: The 451 M&A KnowledgeBase, Tier1 Research

Sonic Solutions-DivX: a big swing back to the same place

Contact: Brenon Daly

The market giveth and the market taketh away. While the giving and taking are usually lopsided, there are rare occasions when it does balance itself out. Consider the recent swings in Sonic Solutions. The company announced the largest deal in its history, the $325m acquisition of DivX, on June 2. Along with the purchase, it also warned that financial results for the quarter were going to be a bit light. That started a slide in shares of Sonic Solutions that had lopped off 40% of the company’s market value by July.

The pain of that slide wasn’t lost on shareholders of DivX. The reason: roughly two-thirds of the consideration for their company was coming in the form of Sonic Solutions stock, with the remaining one-third in cash. (We noted near the bottom of the stock’s slide that the decline had cut the purchase price of DivX by about $50m, or 15% compared to the original offer price.)

But by the time the transaction had closed last Friday, shares of Sonic Solutions had regained the ground they had lost in the four months since the deal was announced. In fact, Sonic Solutions closed Friday at almost exactly the same price it did the day before the company announced the acquisition. So from the perspective of DivX, it was almost like nothing at all happened this summer.

Talk is cheap, but BMC isn’t

Contact: Brenon Daly

All the talk around an acquisition of BMC may be just that – talk. We have a hard time believing some of the rumored buyers for the IT management vendor. That skepticism was shared by a few bankers who we spoke with about the rumor. In fact, they reminded us that the most recent M&A buzz around BMC had the company as a buyer, not a seller. Several sources have indicated that BMC was an early bidder for security provider ArcSight, but dropped out quickly when the price got a bit rich.

Nonetheless, M&A speculation pushed BMC shares Thursday to their highest level in a decade. Currently, the company garners a market cap of $7.6bn. Fittingly for a 30-year-old firm, BMC sits on a pile of cash. It has some $1.4bn in its treasury, although a bit of debt lowers its net cash position to about $1.1bn. The company recently indicated that it would generate in the neighborhood of $700m in cash from operations in the current fiscal year, which ends in March. Sales for the fiscal year are expected to come in at $2bn.

With an enterprise value of roughly $6.2bn, BMC currently trades at more than 3 times projected sales and almost 9x projected cash flow. Even without a take-out premium, those are fairly rich multiples for a company that grows just 2% per year. A premium could take BMC’s equity value to around $10bn.

Obviously, there are only a few companies that could write that a check that big and if we were to short-list them we would probably put Oracle and Cisco Systems on there – but for different reasons. The $1bn of maintenance revenue that flows steadily to BMC each year would undoubtedly catch Oracle’s eye. But buying $1bn of annual maintenance revenue for, say, $8bn (on a net cost basis) doesn’t look like the kind of bargain Oracle typically strikes.

And while Cisco has partnered with BMC for the management within its Unified Computing System, it’s not clear to us that Cisco actually needs to own BMC to further its interest in outfitting datacenters. To our mind, Cisco should just put the money it would spend on BMC toward the company that it should really buy: EMC.

Virtual goods, real interest

Contact: Jarrett Streebin

It turns out there’s a real business around buying and selling make-believe items online. Although it’s still early in the so-called virtual goods market, companies have already begun positioning themselves for what looks to be a fast-growing market for personalizing and developing online games. On a small scale, e-Rewards acquired Peanut Labs last week, less than two months after Google announced a purchase of its own. Peanut Labs will become part of e-Rewards’ Research Now online sampling and data-collection business unit. We expect more activity in this nascent market, which is likely to be shaped by three main players: Facebook, PayPal and Google.

Each of these tech giants has shown serious activity around virtual goods, either through organic development or acquisitions, and each has a slightly different approach to the market. Earlier this year, Facebook unveiled its Facebook Credits, a payment system for the Facebook platform. These Credits can be used to buy gold or guns in games on the platform and are even sold in gift cards at Walmart. Meanwhile, PayPal currently handles roughly 50% of the volume for virtual goods. It’s a payment option for Facebook Credits and PayPal continues to improve upon developer relations with its payment platform X and developer conference. And finally, Google bought into the space in early August with the purchase of Jambool and its virtual goods payments processor Social Gold. We will have a full look at the approaches of each of these three companies, including where they might look to buy, in a Sector IQ on virtual goods in tonight’s Daily 451 and 451 TechDealmaker sendouts.

For CLECs, valuations flatline

Contact: Ben Kolada

As the retail wireline communications industry loses steam, valuations for competitive local exchange carriers (CLECs) have flatlined. Regardless of whether or not the firms were growing their bottom line, CLECs are being sold at just north of one times trailing revenue. We don’t see much that would change this metric.

EarthLink’s recent purchase of ITC DeltaCom is the third instance in the past year in which a regional CLEC was acquired by a larger provider. The deal was announced shortly after PAETEC picked up Cavalier Telephone and just under a year after Windstream Communications bought NuVox Communications. Of these three providers, we believe only NuVox was growing its revenue, while Cavalier was experiencing losses and ITC DeltaCom was lying stagnant.

Yet all three firms were valued nearly the same. EarthLink’s offer for ITC DeltaCom values the Huntsville, Alabama-based company at just 1.1x trailing sales, including debt, while both Cavalier and NuVox went for 1.2x. (As a side note, we would add that both Cavalier and NuVox were owned by M/C Venture Partners.)

We wouldn’t be surprised to see other similarly sized CLECs – such as Cbeyond, TelePacific Communications or Integra Telecom – fetch roughly the same valuation in any sale. For example, take Cbeyond, which is similar in size to ITC DeltaCom. The firm is currently priced at 0.9x trailing sales, nearly mirroring the 0.8x valuation ITC DeltaCom had in the day before EarthLink announced that it was buying the company.

Recent CLEC valuations

Date announced Acquirer Target Enterprise value EV-TTM sales multiple
October 1, 2010 EarthLink ITC DeltaCom $516m 1.1
September 13, 2010 PAETEC Cavalier Telephone $460m 1.2*
November 3, 2009 Windstream Communications NuVox Communications $664m 1.2

Source: The 451 M&A KnowledgeBase *451 Group estimate

Oracle steps back into M&A market

Contact: Brenon Daly

After taking the summer off from M&A, Oracle on Monday announced the acquisition of authentication management startup Passlogix. The purchase is the first one by the normally acquisitive Oracle since it announced a pair of asset pickups in late May. Sitting out the summer slowed Oracle’s pace from steady deal flow earlier this year as well as other years. The Passlogix buy is Oracle’s eighth deal in 2010.

The first seven purchases, however, came in the first five months of 2010. That was ahead of the M&A pace Oracle held from 2005-2008, when it inked an average of a deal a month in each of the years. Oracle announced just eight acquisitions in recession-wracked 2009, when overall M&A activity was muted.

As we noted in our report on Q3 M&A, Oracle was one of the highly visible companies that didn’t announce a single transaction in the July-September period. Similarly, both Microsoft and Symantec sat out the quarter, too. But their inactivity was more than made up for by fellow tech giants Hewlett-Packard and IBM. That duo went on an M&A safari in the third quarter, with an eye toward bagging big game. In the just-completed July-September period, IBM and HP combined to announce 11 deals with a total bill of more than $7.3bn.

Via Oak Hill, ViaWest expands

Contact: Ben Kolada, Jeff Paschke

In its first acquisition under new ownership, ViaWest announced today that it is buying three Salt Lake City datacenter facilities from Consonus Technologies. The transaction is the first in a line of expected deals after the company received a capital infusion from its sale to Oak Hill Capital Partners in April.

Financial terms weren’t disclosed; however, our analysts at Tier1 Research estimate that the transaction was in the range of $35-40m. The acquisition brings ViaWest’s total Salt Lake City datacenter count to six, and comes just three months after the vendor announced that it was adding 14,000 square feet to one of its existing Salt Lake City facilities.

Indeed, even at the high end of our estimated range, $40m may seem to be a bargain for three facilities with a combined total of 100,000 square feet of datacenter space. However, we would point out that ViaWest is not in the business of owning the shell building, but rather just the internal infrastructure (generators, switches and all furniture and fixtures). Its facilities are generally maintained on a long-term lease basis.

Under Oak Hill’s wing, we expect ViaWest to continue to acquire additional properties. (The firm inked three other deals under previous ownership, according to The 451 M&A KnowledgeBase.) Given its past acquisitions, ViaWest appears to prefer buying into new markets, rather than acquiring properties in markets where it already has a presence. As such, we don’t expect to see another market-consolidating play anytime soon. The company has a strong foothold in the western US – Salt Lake City follows Denver and Dallas as the firm’s third-largest market, in terms of usable datacenter space – but ViaWest executives have told us in the past that acquisitions will not necessarily be limited to the western states.