Category: M&A

Third-quarter M&A: Forget the headlines

Brenon Daly

Contact: Brenon Daly

To get an accurate read on M&A this summer, you have to look past the headlines. Undeniably, there were a few high-profile deals, including the sale of McAfee in the largest deal ever in the security industry, as well as a high-profile bidding war that pushed 3PAR’s valuation into the double digits. Beyond those transactions, however, deal flow in the third quarter, which wraps today, has been distinctly average. Spending is coming in at $46bn, only slightly above the average spending of $40bn in the eight quarters since the Credit Crisis erupted.

The $46bn also sits at the midway point of spending in the first two quarters of the year ($30bn in Q1 2010 and $62bn in Q2 2010). It also nearly splits the difference between the previous year’s quarter ($38bn in spending in Q3 2009) and the previous quarter this year ($62bn in spending in Q2 2010). We’ll look at why the value of deals announced in late summer dropped one-quarter from the record level in early summer in a special report tonight, but for now consider this: Of the five largest transactions so far in 2010, just one was announced in the third quarter. Again, we’ll have a full report on Q3 M&A in tonight’s Daily 451 and 451 TechDealmaker sendouts.

HCM deal flow nears high-water mark

Brenon Daly

Contact: Brenon Daly

Dealmaking in the human capital management (HCM) market has surged in recent months, pushing spending to near-record levels. So far this year, we’ve tallied 36 HCM transactions, with an aggregate value of $1.9bn. That basically matches the high-water mark of $2.1bn in the sector set during the first three quarters of 2007. (However, we should note that nearly all of the HCM spending three years ago came from the $1.8bn take-private of Kronos by Hellman & Friedman in March 2007.)

The number of HCM transactions so far this year (36) matches exactly the number during the same period in 2007. Another similarity between the two years is that strategic and financial buyers have both been active in the sector. Consider this: In the four deals announced so far this month, buyout shops have been behind two while corporate buyers have inked the other two. Valuations for this month’s transactions – and most other recent HCM deals, for that matter – have ranged from just below 2 times trailing sales to around 4x trailing sales.

However, in the sector’s latest acquisition, the valuation came in well north of that range. On Monday, private equity firm Madison Dearborn Partners (MDP) took a majority stake of Fieldglass in a transaction that valued the HCM vendor at more than $220m. (ArchPoint Partners advised Fieldglass in the deal between the two Chicago-based firms.) Fieldglass focuses on the so-called contingent market, which covers project-based contractors, offshore workers and so on. According to our understanding, Fieldglass generated nearly $30m in revenue and $5m in EBITDA in 2009 and was tracking to nearly $40m in sales and $10m in EBITDA for this year. That means MDP’s stake valued the company overall at about 6x trailing sales, according to our calculations.

salesforce.com patches a hole in its Service Cloud

Brenon Daly

Contact: China Martens

For some time, we’ve been expecting salesforce.com to make a second purchase in the service automation space. It’s a market the SaaS CRM and development platform player took a major step into back in early 2009 following its $31.5m purchase of French knowledge base provider InStranet in August 2008. It now appears as though salesforce.com has indeed made another foray with the acquisition of enterprise live chat player Activa Live, a move the companies aren’t commenting on but have confirmed to several third parties.

Based in St. Clair Shores, Michigan, Activa Live’s customers include American Apparel, Best Buy, Dun & Bradstreet, Endeca, LexisNexis and Procter & Gamble. The startup already had tight integration with Salesforce CRM. Its rivals include other chat specialists such as Bold Software, LivePerson and Velaro as well as a host of service automation software players that provide live chat modules such as eGain Communications, Kana, Moxie Software (formerly known as nGenera), Parature and RightNow Technologies.

Salesforce.com has been steadily building out Service Cloud and has found turning on-premises InStranet SaaSy a time-consuming experience. It’s keen to substantially grow the business, and owning more service automation components should further that goal.

Activa Live is another of salesforce.com’s under-the-radar purchases, deals that it barely refers to in public or doesn’t acknowledge at all. Such transactions already include the acquisitions of Welsh business orchestration firm Informavores, semantic analysis player GroupSwim, and reportedly Canadian SaaS website building, managing and optimizing tools provider Sitemasher.

Salesforce.com is still sitting on a boatload of cash after raising $575m in a private placement at the start of the year, and has only inked one substantial deal in its history – the surprise $142m acquisition of data-as-a-service (DaaS) provider Jigsaw Data in April. We continue to puzzle over what larger transactions salesforce.com might set its cap at, and would now add business information provider Zoom Information to the list as being potentially complementary to the vendor’s Jigsaw buy. DaaS is another arena where salesforce.com hopes to make big bucks

PAETEC’s risky business

Ben Kolada

Contact: Ben Kolada

As the communications industry continues to consolidate and the pool of desirable targets dries up, the remaining buyers appear to be stretching a bit in their M&A moves. But even within that, PAETEC’s recent pickup of Cavalier Telephone looks to us like the riskiest telecom acquisition we’ve seen in the past year. The reason? Roughly three-quarters of Cavalier’s business is outside PAETEC’s focus.

To be fair, other telcos have also made challenging moves. Windstream Communications took big bites in the past 12 months, acquiring four companies that set the telecom provider back $2.7bn. (That figure includes the debt at the acquired companies that Windstream will be taking on.) The vendor’s spree boosts its top line by about 50%, a substantial increase that brings a not-insignificant amount of risk. Even Cablevision Systems, which is typically a stay-at-home company, inked a deal, reaching across the country to pick up Bresnan Communications for about $1.4bn.

However, the deals by Windstream and Cablevision made sense, if just because they expanded on each company’s existing strategy. Not so with PAETEC’s purchase of Cavalier. When we look at the transaction, we suspect that PAETEC was really only interested in Cavalier’s fiber assets. Understandably, the Richmond, Virginia-based competitive local exchange carrier wouldn’t have considered selling its fastest-growing division. Since it was unable to just get the part of Cavalier’s business that it probably wanted, PAETEC was forced to shell out $460m (including assumption of debt) for the whole company.

Cavalier had $390m in sales in the year leading up to the acquisition. However, the company’s fiber division itself generated only about $98m, or 25%, of total revenue. That means that a vast majority (75%) of Cavalier’s business appears to us to be an ungainly match to the business its buyer is in. PAETEC serves enterprises, which generate an average of $2,300 in monthly revenue. On the other hand, the majority of Cavalier’s revenue comes from consumer accounts and small businesses with monthly recurring revenue of only about $500.

Rather than spend to get this odd pairing, we think PAETEC would have been better off buying one of the number of fiber operators looking for a sale. A juicy target would have been Zayo Group. The company is on a $240m run rate for 2010. Based on recent valuations for Zayo’s competitors, we believe it could be had for roughly $500m – only slightly higher than Cavalier’s price tag, but without the unwanted baggage.

Valuations separated by more than the Atlantic

Brenon Daly

Contact: Brenon Daly

Comparing the valuations of US tech companies with their European counterparts, we can’t help but notice the fact that the recovery hasn’t been enjoyed equally on both sides of the Atlantic. We noted a few months ago that the strong US dollar had opened the way for some opportunistic shopping on the continent. Although most European currencies have inched back up since then, there are still discounts available because the valuations of the companies are still lagging their US peers and rivals.

Earlier this summer, we pointed out that discrepancy in Deltek Systems’ purchase of Maconomy, which valued the Danish ERP vendor at twice the level it started the year – but still below Deltek’s current valuation on the Nasdaq. Similarly, Adobe acquired Day Software at a price that was four times higher than the Swiss company’s own valuation last summer. However, Adobe’s own valuation is higher than the take-out valuation for Day, which included a 60% premium. (Adobe is still valued higher, even though it lost 20% of its value Wednesday after forecasting weaker-than-expected results.)

But those deals pale in comparison to the arbitrage that OpenTable did in its reach across the Atlantic for toptable.com. OpenTable values the British restaurant reservation service at basically 6 times trailing sales, while the San Francisco-based company trades at 19x trailing sales. (For those of you who haven’t looked lately, OpenTable trades in the mid-$60 range, commanding a market cap of some $1.5bn. Incidentally, various measures of OpenTable’s valuation – specifically, both trailing and forward price to earnings ratio – line up almost exactly with those of salesforce.com.)

IBM and HP bag big game on M&A safari

Brenon Daly

Contact: Brenon Daly

With the news today that Hewlett-Packard is closing its recent pickup of Fortify Software, we wanted to take the opportunity to point out that the deal almost belongs in the minority of M&A moves HP has made so far this year. What are we talking about? Basically, that the tech giant has been doing giant deals. Of the seven acquisitions HP has announced so far in 2010, fully three of them have been valued at more than $1bn.

We noted in mid-April, which is before it inked any of its three 10-digit acquisitions, that HP had telegraphed to the market that it was going to do fewer transactions, but they were going to be bigger deals. (And we should add that its purchase of application security vendor Fortify wasn’t just a pocket-change deal. We understand that it paid $275m or so for the company.)

What’s interesting to note is that in the five months since we indicated that HP would be big-game hunting, one other company has joined it on safari: IBM. Big Blue has inked a pair of deals valued at more than $1bn since April – the pickup of AT&T’s Sterling Commerce business as well as Monday’s purchase of Netezza. Along the way, it has also done a steady flow of transactions valued at $150m-500.

Altogether, we calculate the tab for Big Blue’s five-month shopping spree at roughly $4.8bn for its nine acquisitions. (Incidentally, the amount of cash it spent is basically the same amount its business generated over that same period.) Meanwhile, HP spent about $1bn more ($5.8bn in disclosed or estimated deal values) on its seven purchases since mid-April. Taken together, these two companies have averaged about $2bn of M&A spending in each of the past five months. And they were sniping at each other about ‘buying’ R&D? Really?

M&A activity since mid-April 2010

Company Number of acquisitions Total M&A spending
HP 7 $5.8bn*
IBM 9 $4.8bn*

Source: The 451 M&A KnowledgeBase *Includes disclosed and estimated deal values

A bit of Big Blue inconsistency

Brenon Daly

Contact: Brenon Daly

Perhaps Mark Hurd feels vindicated. No, we’re not referring to the former Hewlett-Packard chief executive settling a lawsuit with his old shop. Instead, we’re talking about IBM’s stunning flip-flop with regard to high-profile M&A by itself and rival HP. At the least, Big Blue’s recent comments now appear inconsistent; at the worst, they smack of hypocrisy.

The specifics: A week ago, Big Blue’s CEO was blasting HP for ‘overpaying’ for deals, and for relying on M&A rather than R&D. Ironically, Sam Palmisano made these comments just as his own company was putting the final touches on its acquisition of Netezza, a deal that values the data-warehousing vendor at nearly 7 times this year’s forecasted sales for the current fiscal year. That’s more than twice the median software valuation, and basically matches the valuation that HP is handing over for ArcSight.

Incidentally, both transactions valued the targets, which had only come public within the past three years, at their highest-ever valuations. But if we look at how the shares of ArcSight and Netezza have performed so far this year, it becomes very clear that IBM was the much more aggressive suitor. Excluding the pop ArcSight shares got when word of a deal leaked in late August, the security vendor’s stock had only ticked up about 10%. In contrast, Netezza stock had run 150% from January to the day before Big Blue announced its purchase.

A Big Blue move into the data warehousing market

Brenon Daly

Contact: Brenon Daly

A little more than three years after Netezza debuted on the NYSE, the data-warehousing vendor is being erased from the Big Board at basically twice its valuation at the time of its IPO. Under terms, IBM is handing over $27 in cash for each share of Netezza, which went public at $12 in July 2007. However, after the strong debut, which valued the company at around $1bn, gravity set in on Netezza shares. They spent most of 2008 and all of 2009 under the $12 offer price.

Earlier this summer, however, Netezza shares started running. The run was fueled by strong second-quarter results that saw total revenue surge 45%, as well as lingering M&A rumors. (We noted in early July that we had heard EMC was interested in Netezza before it opted for rival data-warehousing vendor Greenplum. IBM’s bid values Netezza at twice the level it was trading at the time.)

As Netezza shares continued climbing to new highs on the market, the move whittled away the premium Big Blue is offering. Compared to the previous day’s close, IBM is paying just a 10% premium for Netezza. But judged against where Netezza was trading a month ago, the premium is 80%. We would add that Netezza shares have traded above the $27 bid since the open Monday morning. UBS advised IBM, while Qatalyst Partners advised Netezza.

Based on the enterprise value of $1.7bn given by IBM, the offer values Netezza at 8.9 times sales in its fiscal year that ended in January. (As a trading comparison, Teradata currently garners a valuation that’s about one-third that level.) At the end of its second quarter, Netezza guided Wall Street to expect about $250m in sales for the current fiscal year, meaning IBM is paying 6.8x projected sales. While that is a relatively rich valuation, it’s much lower than rival EMC paid in its big data-warehousing purchase. We understand that it handed over $400m for Greenplum, which was running at about $30m in sales.

Any deals to be done in open source content management market?

Brenon Daly

Contact: Brenon Daly, Kathleen Reidy

Following a massive wave of consolidation that swept through the enterprise content management (ECM) market, the list of significant vendors has basically narrowed to a handful of tech giants. Essentially, it’s just one stand-alone ECM provider with other software companies offering ECM as part of their broader portfolio. All of them have done deals to expand their ECM business, with the collective bill for acquisitions across the sector topping more than $12bn since 2002.

However, all of that activity has been done by – and for – proprietary software firms. In a recent report, my colleague Kathleen Reidy analyzes how M&A might play out for open source content management startups. Granted, the market is still young, with many of the startups still bootstrapped. (Reidy looks at a dozen potential open source content management targets, including their funding and their focus.)

So which startup might be the first to go? We speculate that Alfresco Software could eventually find itself inside a larger company. However, it probably won’t be the company we initially thought it would be. Adobe and Alfresco have a tight relationship, with Adobe embedding an Alfresco repository in its LiveCycle for content services like workflow, indexing and version control. But with Adobe reaching across the Atlantic for Day Software, it probably has all the Web content management technology it needs.

OpenPages: a restart that finished strong

Brenon Daly

Contact: Brenon Daly

In the startup world, a restart rarely goes anywhere. What typically happens is a company swaps one failing business plan for another, with the inevitable wind-down delayed only by a fresh round of capital. Yet that’s not the case with OpenPages, which secured a solid exit with its sale to IBM after completely overhauling its business.

OpenPages, which sells software for the governance, risk and compliance (GRC) market, has virtually nothing in common with the company that started out in 1996. As its name implies, OpenPages was originally a content management vendor. The firm survived the dot-com bust, but only after trimming its headcount from more than 300 down to 15. In the aftermath, it also switched to Plan B for the business: GRC.

Although the initial draw to the GRC space was Sarbanes-Oxley, OpenPages found success in the broader market. By 2006, Sarbanes-Oxley only accounted for about 15% of revenue at the firm. As it recast its business, OpenPages also recapitalized the business. It raised some $10m in 2004 and added another $10m in 2007. (Back in the Bubble Era, it had raised about $60m from investors.)

The sale to IBM makes a fair amount of sense, both strategically and financially. Big Blue and OpenPages have been partners for at least three years. In addition to OpenPages’ technology fitting well with the BI portfolio IBM acquired with Cognos, there’s also a large chunk of services revenue that Big Blue can pocket around an OpenPages implementation. (OpenPages has some 140 customers.)

And, at least as we understand the deal, the exit valued OpenPages at a healthy 5 times its estimated $35m in sales. (Both the price and the valuation line up almost exactly with the other large GRC deal of the year, EMC’s purchase of Archer Technologies back in January.) In our view, whatever valuation OpenPages got should probably be viewed as a rich one when we consider the fact that the company nearly died penniless earlier in its life.