Category: M&A

Is SafeNet looking to secure an IPO?

Brenon Daly

Contact: Brenon Daly

A little more than three years after it went private, SafeNet is looking to return to the public market. Several sources have indicated that the encryption vendor has lined up its underwriters and plans to file an S-1 in about two weeks. If indeed the offering goes ahead, it will face a market that is proving rather hostile to IPOs right now. (We recently looked at the dreary state of the IPO market in a special report.)

Through both organic and inorganic growth, the SafeNet that returns to the market will be about half the size of the one that stepped off the market. We understand that the company is running at about $450m in revenue, compared to about $300m in revenue in the year leading up to its leveraged buyout. While private, SafeNet did a handful of small deals as well as the contentious $160m take-private of Aladdin Knowledge Systems.

An IPO would mark a second straight exit for SafeNet’s owner, Vector Capital. The buyout shop sold its Register.com portfolio company last week, realizing a return of two and a half times its investment. Vector took the Web registration and design firm private in 2005, pared down the business, made it dramatically more profitable and then sold it to Web.com.

Also noteworthy about the rumored IPO by SafeNet is that the offering is being handled entirely by bulge-bracket banks. The book-runners are said to be JP Morgan Securities, Morgan Stanley and Goldman Sachs, with the offering co-managed by Bank of America Merrill Lynch and Deutsche Bank. Off the top of our heads, that’s the first tech IPO that we can think of that doesn’t have a regional or boutique bank also helping to bring out a company.

LANDesk nearly done

Brenon Daly

Contact: Brenon Daly

After a nearly half-year process, Emerson Electric is close to having LANDesk off its books. Emerson, which picked up the systems management vendor when it acquired Avocent for $1.2bn last fall, classifies LANDesk as a ‘discontinued operation’ and hired Greenhill & Co to advise it on the divestiture. We understand that final bids are being submitted right now, and a deal announcement is expected in two weeks or so.

Although it’s unclear who will end up with LANDesk, several sources have indicated that the buyer is likely to be another company, rather than a buyout shop. (Corporate castoffs often land in the portfolios of PE firms for a period of ‘rehabilitation’ before being snapped up by another company. Indeed, that was the path for LANDesk, which was sold off by Intel in 2002 to a pair of PE buyers, Vector Capital and VSpring Capital, before being bought four years later by Avocent.) Of course, a PE buyer could pair the LANDesk property with an existing portfolio company to enjoy some of the cost savings that generally allow strategic buyers to outbid pure financial buyers.

In an earlier report, my colleague Dennis Callaghan highlighted a few potential buyers for LANDesk, including virtualization vendors, hardware companies and security firms. However, we understand that the obvious suitors in those sectors are no longer in the process: VMware and Lenovo, both of which have key partnerships with LANDesk, are said to have moved on.

Another corporate buyer that we can scratch off the list? Novell. Apparently, the company was aggressively courting LANDesk early in the process, including offering a rumored high price in exchange for exclusivity. Of course, Novell has other issues to contend with, and may well be a seller of the overall company rather than a buyer of other assets.

Vector ‘registers’ a solid exit

Brenon Daly

Contact: Brenon Daly

A half-decade after taking Register.com private, Vector Capital announced the sale of the website registration and design provider to Web.com Group for $135m. That’s a fair bit lower than the $200m the buyout shop paid for the equity of Register.com in the LBO, but a fair bit above the company’s net cost of about $90m. (Profitable and debt-free Register.com held about $55m in cash and another $55m in short-term investments when it was taken private.)

As for the return, we understand that between two dividends, a divestiture and now the sale of the business, Vector realized about 2.5 times its original $60m equity investment on Register.com. What’s interesting about the return is that Vector is making money on its holding even though Register.com actually shrank in the time it was owned by the buyout shop. Consider it a case of quality over quantity.

When it went private, Register.com was clipping along at a rate of about $25m per quarter. According to Web.com, that level has now dipped to $20m per quarter. (That may or may not be a sandbagged projection from the acquirer.) Part of the revenue decrease can be attributed to the fact that Register.com shed the corporate domain management business, which was doing just shy of $8m each quarter in business. So, on an absolute basis, the property is smaller, but on a comparable basis, the Register.com business grew on the top line.

Far more important than revenue growth is the fact that Register.com became far more profitable as a private company. (Some cuts appear pretty obvious to us: In the period before it went private, Register.com was spending about one-third of its revenue on sales and marketing.) On the conference call discussing the deal, Web.com indicated Register.com was running at a mid-to-high 20% ‘adjusted EBITDA’ margin. That’s a pretty rich level. In fact, it’s about 10 percentage points higher than Web.com’s own ‘adjusted EBITDA ‘ margins.

A potential quarter-billion dollar M&A hangover for JDA

Brenon Daly1 Comment

Contact: Brenon Daly

The cost of JDA Software’s purchase of i2 Technologies just got a lot steeper. A jury has found that i2 software failed to do what it was supposed to do for department store chain Dillard’s. The case goes back a decade, long before JDA picked up the supply chain vendor. (The $568m acquisition, which we called a buyout-style play, closed in December 2009 after a very rocky process that played out during the depth of the credit crisis.)

As part of its decision, the jury awarded Dillard’s a whopping $246m: $8m of that for direct damages and $238m in punitive damages. JDA says it will appeal the verdict. Regardless of outcome – and how much JDA has to pay – the company has already lost in the court of Wall Street. Investors sliced $215m, or 20%, off JDA’s valuation on June 16. (Shares of the supply chain management vendor are now changing hands at about 10% lower than they were when the deal closed, compared to a 5% gain in the Nasdaq over the same period.)

With JDA on the hook for a quarter-billion dollars (at least potentially) because of legal problems at an acquired company, it joins a dubious list of buyers that have gotten burned. Most notably, SAP picked up software maintenance provider TomorrowNow in early 2005 as a way to siphon off some of the rich maintenance stream that Oracle collects for supporting its application. Oracle sued SAP, alleging that TomorrowNow illegally downloaded information about Oracle’s support program ‘and then used that data to service its own customers.’ SAP has since shuttered the division. It looks likely that the Oracle-SAP case will go to trial later this year.

Looking at Lawson

Brenon Daly1 Comment

Contact: Brenon Daly

What was shaping up as an explosive showdown between Carl Icahn and Genzyme has been defused ahead of today’s board meeting at the biotech company. By adding two nominees selected by Icahn to the expanded board of directors, Genzyme avoided the full-blown proxy fight that had been brewing. With that matter settled, we wonder if Icahn will turn his attention to his newest tech investment – Lawson Software.

The gadfly investor owns stock and options equaling about 15.6 million Lawson shares, or roughly 9.7% of the old-line ERP vendor. As is often the case in his investments, Icahn says he will push for moves that maximize shareholder value, which could include a sale of the company. However, we would note that in his recent role as shareholder activist, Icahn hasn’t succeeded in putting his holdings in play.

Although he helped spur the sale of BEA Systems in early 2008, his more recent agitation hasn’t necessarily resulted in M&A. Among other holdings, Icahn has owned or currently owns stakes in Yahoo, Motorola and Mentor Graphics – all of which still trade on their own. Likewise, we suspect Lawson will remain independent, even if Icahn pushes for a sale.

For starters, the company isn’t cheap. Shares have tacked on 60% over the past year – twice the return of the Nasdaq and three times the gain of Oracle over the same period. That gives Lawson a market capitalization of $1.3bn. (It holds roughly the same amount of cash and debt, so Lawson’s enterprise value is also about $1.3bn.)

If we assume the company will generate about $350m in maintenance revenue in its current fiscal year, Lawson currently trades at 3.7 times its maintenance revenue. A conservative 30% premium on top of Lawson’s current valuation would add $400m to the price, for a total cost of $1.7bn or nearly 5 times maintenance revenue. That valuation isn’t overly rich, but it is probably at the high end of the range that a financial-minded buyer could make work.

Securing a busy time for M&A

Brenon Daly

Contact: Brenon Daly

Overall M&A is nowhere near the level it was in the boom days of 2007, but there is one sector where deal makers are actually more active than ever: IT security. So far this year, we’ve tallied 45 security acquisitions with an aggregate deal value of some $5.4bn. That is substantially higher than the same period in the previous two years, when the recession knocked M&A into a tailspin.

This year’s level of security M&A is even higher than the $3.7bn spent on 44 deals that we recorded in the same period in 2007, which was a record year for tech acquisitions. The activity in the sector stands out even more when we consider that, overall, deal makers have spent a total of just $80bn on transactions across all sectors so far this year – just one-third the level of spending at this point in 2007.

Perhaps the single biggest reason for the jump in spending so far this year has been the return to the market of Symantec. On its own, Big Yellow accounts for about one-third of the total shopping bill in the sector, having announced four deals valued at nearly $1.7bn in 2010. Included in that quartet of purchases is the pick-up of the identity and authentication business from VeriSign, which was Symantec’s largest single transaction since its misguided purchase of storage company Veritas Software in December 2004. It also announced a pair of deals for encryption vendors in a single day in April.

The other security deal this year we’d highlight is the planned take-private of SonicWALL. With an equity value of $717m, that’s the largest security LBO we’ve seen in some time. (For comparison, a year ago, the same buyout shop, Thoma Bravo, took digital identity firm Entrust private in a deal valued at just $124m.) Add in other smaller deals by McAfee, EMC, Oracle and Check Point Software, and the security M&A market has been busy this year. Given the strength of the sector and the broad base of buyers, we expect activity to remain brisk for the rest of 2010.

Security M&A

Period Deal volume Deal value
Jan. 1 – June 14, 2010 45 $5.4bn
Jan. 1 – June 14, 2009 33 $381m
Jan. 1 – June 14, 2008 35 $648m
Jan. 1 – June 14, 2007 44 $3.7bn

Source: The 451 M&A KnowledgeBase

HTC bids on mobile ads

Contact: Jarrett Streebin

In the shadow cast by Apple’s iPhone 4 release, HTC’s purchase of Paris-based Abaxiaon Monday went largely unnoticed. Granted, it was a small deal, costing HTC just $13m. But it has the potential to be a big deal, since it bolsters HTC’s offering in the emerging mobile advertising market.

Abaxia, which has worked with HTC since 2001, offers a cross-platform UI for idle screens. HTC already has a UI called the HTC Sense that sits on top of Google’s Android OS. The Taiwanese device vendor has incorporated its own custom applications and some MDM capabilities into Sense. While similar, Abaxia offers a platform for pushing mobile advertising to idle screens. This acquisition provides HTC a modest entry into an area that Apple has already staked out with its iAd product.

Although HTC entered the North American and European markets as a white-label device for carriers, its advanced devices and early support for Android have boosted the value of its brand. Customers have been snapping up the phones, with both Verizon and Sprint reporting they have sold out of some HTC devices. The Droid Incredible and EVO 4G are the strongest competition to Apple’s iPhone 4, which means they are also comparable ad delivery platforms. Now that HTC has proved it can compete with Apple devices, it’s time to take on Apple’s iAd.

Emulex goes from defense to offense

Brenon Daly

Contact: Brenon Daly

This time a year ago, Emulex was stiff-arming an unwelcome suitor. Now, it is warmly embracing another company. Emulex said Monday that it will acquire ServerEngines for $159m in cash and stock.

It will hand over about $78m in cash and eight million shares, which were valued at $81m based on Emulex’s closing price ahead of the announcement. The deal, which is expected to close in July, also has a possible earnout of four million shares that would be paid over the next two years. (While the terms are fairly straightforward, it does have one surprising agreement: a $10m breakup fee, representing a fairly steep 6% of the deal value.)

Emulex’s purchase of its partner comes a year after the vendor fended off an unsolicited bid from larger rival Broadcom. The fight between the two Southern California companies turned particularly nasty during the two-and-half-month process, which ended last July after Emulex’s board shot down Broadcom’s offer for a second time. (For the record, shares of Emulex trade at roughly the level of Broadcom’s first offer but 14% below its topping bid.) The two companies are still battling it out in the courtroom over alleged patent infringement.

As a final thought, we would note that Emulex’s contentious relationship with Broadcom is probably not an unknown feeling at the firm that it just acquired, ServerEngines. A decade ago, the CEO of SeverEngines, Raju Vegesna, sold his previous company ServerWorks to Broadcom for $1.8bn. He left two years later after a fallout with Broadcom leadership over the strategic direction of the business.

The deepening discount on DivX

Brenon Daly

Contact: Brenon Daly

A week ago, Sonic Solutions announced that it was making its largest-ever acquisition: the $325m cash-and-stock purchase of DivX. While that pending transaction remains the biggest deal that the digital media management vendor has ever considered, it is getting smaller virtually every day. Because of the decline in shares of Sonic Solutions, the price tag for DivX has been trimmed by about $50m, or 15%.

Under terms, Sonic Solutions will hand over $3.75 in cash and about half a share (0.514) for each share of DivX. The cash portion is fixed, so DivX shareholders stand to pocket about $125m from that. On the other hand, the value of the stock component of the proposed transaction varies from day to day, depending on the price of shares of Sonic Solutions.

On the day before Sonic Solutions announced the acquisition, the company’s stock closed at $11.83. Based on that price, DivX shareholders stood to pocket about $200m of equity consideration ($11.83 x 0.514 = $6.18/share x 33 million DivX shares = $200m). With its stock finishing trading Monday at $8.83, the total value of the equity that Sonic Solutions will hand over to DivX shareholders has dropped to $150m. So altogether, the consideration for DivX is about $275m. But the value is headed even lower. On Tuesday, Sonic Solutions shares closed lower — the fifth straight decline since announcing the acquisition.

Deltek deal shows Atlantic trade winds are blowing

Brenon Daly

Contact: Brenon Daly

As the hackneyed old phrase goes, there is opportunity in crisis. We were musing on that as we watched the euro plummet at the end of last week to a four-year low against the dollar. With countries such as Greece, Portugal and, most recently, Hungary unable or unwilling to run balanced books, much of the continent looks shaky. Reflecting the worries caused by the ballooning debt in many countries, the euro has shed 15% of its value compared to the US greenback.

While it is undoubtedly a tough time for many of our cousin countries across the Atlantic, some US companies might be having a different take on this period of European malaise: it’s a great time to do some opportunistic shopping. For starters, US buyers are getting a nice little discount thanks to the dollar. If, for instance, a US-based company was eyeing an acquisition in Europe that would have run it $150m at the start of the year, the current cost is less than $130m. And don’t forget that a lot of US companies have a lot of wampum sitting over in Europe that can’t be brought home without a heavy tax hit.

There’s also the fact that the recession hasn’t actually ended for many of the European companies, at least not based on their stock prices. Consider the smartly frugal bit of shopping that Deltek Systems did late last week. The project management software vendor had been looking to expand across the Atlantic, and found a handy bargain in picking up Danish ERP provider Maconomy. (Deltek was advised by Arma Partners.)

In its largest acquisition ever, Deltek will pay around $72m in cash for Maconomy. Even though the premium is substantial (Deltek’s offer is more than triple where Maconomy shares traded a year ago, and twice the price of the stock at the beginning of the year), the valuation of the target is actually lower than that of the acquirer. On an enterprise value basis, Deltek itself trades at about 2.1 times trailing sales, while it is paying just 1.5 times trailing sales for Maconomy. (And again, the valuation of the Danish software firm includes a generous premium.) Bargains like that may well get the trade winds blowing again across the Atlantic.