Category: M&A

Social CRM: haves and have-nots

Brenon Daly1 Comment

Contact: Brenon Daly, China Martens

Even though social CRM is still an emerging market, the deals have been flowing. And it isn’t just one-off, conventional activity, but just about every conceivable type of transaction: public-to-private deals, private-to-private deals, a private equity-backed rollup and even (apparently) a wind-down. Among the more notable deals in this broadly defined space has been RightNow reaching for tiny startup HiveLive last September to add a community offering to its core CRM product and Attensity cobbling together the parts of three companies to form a European giant about a year ago. Attensity was back in the market last month, adding Biz360 to bolster its voice-of-consumer product.

Activity picked up again earlier this week, as Lithium Technologies confirmed that it had acquired Scout Labs for a reported $20-25m. As my colleague China Martens reports, the purchase adds Scout Labs’ social-media monitoring and analytics capabilities to Lithium’s management platform for customer communities. We would highlight the fact that Lithium’s buy comes just four months after the company raised its third round of funding, an $18m tranche that brought total funding to $39m.

While Lithium was raising fresh money – and putting it to work on an acquisition – it appears that another social CRM startup was coming up empty in its effort to get more cash and has pulled the plug. Helpstream, which apparently raised about $10m in two funding rounds from Mohr Davidow Ventures (MDV) and Foundation Capital, has shut its doors, the former CEO has written in a blog post. Helpstream’s website no longer works and MDV has erased Helpstream as a portfolio company, despite leading the vendor’s second round. (Calls to the VCs went unreturned.)

If indeed Helpstream has dried up (as it were), we might point to two reasons why the company struggled. For starters, it was basically a SaaS helpdesk provider that then tried to get into the online customer service community-building game. And if its customers were confused by that, they would have been additionally puzzled by Helpstream’s ‘freemium’ business model. In the end, Helpstream managed to land just 40 paying customers, compared to 200 customers using the free version of its product.

HP: relentlessly reaching for Palm

Brenon Daly

Contact: Brenon Daly

As Hewlett-Packard prepares to report fiscal second-quarter results after the close of the market today, there’s already been an SEC filing related to the tech giant that has attracted a fair amount of interest. That document is the proxy statement for HP’s pending acquisition of mobile OS maker Palm Inc. The background on the deal shows that despite Palm being in a fairly vulnerable financial position, the company managed to attract significant interest.

Perhaps reflecting Palm’s dwindling cash and overall dimming outlook, the $1.2bn deal came together with almost unprecedented speed. It took just two months for the acquisition to transpire. The target – along with law firm Davis Polk & Wardwell and financial advisers Goldman Sachs and Qatalyst Partners – winnowed an initial list of 24 possible suitors to just six companies, including HP, in quick order.

According to the proxy, there were two primary bidders besides HP for Palm, along with other parties that were interested in all or just some of the vendor’s patents. HP initially offered $4.75 for each share of Palm, about one dollar less than the $5.70 per share that it ended up paying for it two weeks later. The reason for the bump? A bid of $5.50 per share from an unidentified suitor, referred to as ‘Company C’ in the proxy.

Thoma Bravo doubles down on Double-Take

Brenon Daly

Contact: Brenon Daly

Just a week after we noted that the bidding for Double-Take Software had hit the final stretch, with a trio of buyout shops still in the running, one of the private equity firms announced plans Monday to pick up the file-replication software vendor. Thoma Bravo, through its Vision Solutions portfolio company, will pay $242m for Double-Take in a take-private that’s expected to close in the third quarter. Assuming it goes through, the deal will end Double-Take’s three and a half years as a public company.

Frankly, Double-Take’s run as a public company was one that we didn’t really understand. It never cracked $100m in sales, and has basically been trapped at the same revenue level it hit in 2007. In that year, the vendor recorded sales of $83m. Although sales jumped 16% to $96m in 2008, they ticked back down to $83m in 2009 and Double-Take recently guided to expect about $86m in revenue this year. And the small company was competing against the replication offerings from some of the largest storage providers on the planet: EMC with RepliStor, Symantec with Replication Exec and the replication products CA Inc obtained in its XOsoft purchase.

Perhaps it’s not surprising, then, that the $10.50-per-share bid is actually slightly below the price Double-Take fetched when it came public. In its December 2006 IPO, Double-Take priced its shares at $11 each. And although the stock did trade at twice that price in late 2007, it has been below the IPO price since September 2008. In its time as a public company, Double-Take basically matched the performance of the Nasdaq.

At an equity value of $242m, the actual cost of Double-Take is much lower. The profitable, debt-free vendor held $89m in its treasury at the end of the first quarter, meaning Thoma Bravo/Vision Solutions will only have to hand over $153m in cash. That’s just 1.8 times this year’s projected revenue, and about 4 times maintenance revenue.

IPO woes

Brenon Daly

Contact: Brenon Daly

For the second straight time, a tech company hoping to come to market has scaled back the money it planned to raise. TeleNav, which started trading Thursday, originally planned to sell shares at $11-13. The mobile navigation service vendor then cut the range to $9-10 before ultimately pricing its seven-million-share offering at $8. The erosion on TeleNav’s terms comes two weeks after Convio also had to reduce the price tag on its IPO.

Of course, in the period between the two IPOs we saw an almost inconceivable market plunge that erased 1,000 points from the Dow Jones Industrial Average in just five minutes. (OK, the collapse might not be inconceivable, but it is proving to be inexplicable. Was it the black-box, high-velocity firms or just a bunch of ‘fat-fingered traders’ that bled the Dow last Thursday?) And while that uncertainty continues to weigh on the overall market, it’s basically stifling the IPO market. After all, if investors are fleeing from billion-dollar companies that are household names, are they really going to embrace unknown and unproven would-be debutants?

But as we note in a new report on the IPO market, Wall Street – as it often does – appears to have swung too far in its avoidance of risk. Investors have been demanding a ridiculously steep discount on the valuations of the companies that want to come public. Take the case of TeleNav, which closed its initial day of trading with a market cap of just $400m. If we back out the cash that TeleNav already held ($46m) along with the cash that it just raised ($45m), the company starts its life on Wall Street with an enterprise value of just $310m. By our back-of-the-envelope calculation, that’s just 2 times sales and 5 times cash flow – a slap-in-the-face valuation for a profitable company that’s growing sales at 50%.

When we look at the capital markets today, we aren’t particularly concerned with the day-to-day trading. Stocks go up and stocks go down, just as risk in the market (real or perceived) ebbs and flows. Nonetheless, it’s hard to look at the tech IPO market and not be struck by the fact that companies are putting together smaller offerings and debuting at notably lower valuations than they would have in the time before the US economy slumped into its worst decline since the Great Depression. And we don’t see that changing anytime soon.

Recent tech IPO events

Date Company Comment
May 2010 TeleNav Cuts expected range, and then prices below it
April 2010 Convio Prices below range, goes public at sub-$200m market cap
April 2010 SPS Commerce Debuts at sub-$200m market cap
April 2010 IntraLinks Files for $150m IPO, the third time it has filed an S-1
April 2010 QlikTech Files for $100m IPO
April 2010 Nexsan Postpones $55m IPO after setting initial range

The German giant’s gamble

Brenon Daly

Contact: Brenon Daly

In the largest software transaction in more than two years, SAP plans to pick up mobility software and database vendor Sybase for a net cost of $5.8bn. SAP’s all-cash bid of $65 per share represents a 44% premium over the three-month average closing price for Sybase. More dramatically, SAP’s offer represents the highest price for Sybase stock in the target’s two decades as a public company.

The purchase, which is expected to close in July, represents a big bet by the German giant on the future of mobile applications. The two companies have partnered for more than a year, with SAP offering mobile CRM and Business Suite applications on Sybase’s Unwired Platform. Currently, mobile products account for one-third of revenue at Sybase, which started life as a database vendor. Within the database segment, Sybase also has an analytic database (Sybase IQ) that has been generating most of the growth in recent years.

At an enterprise value of $5.8bn, SAP is valuing Sybase at basically 5 times sales. (Sybase generated revenue of $1.1bn in 2009 and recently guided Wall Street to expect about 6% sales growth this year.) That’s roughly in line with the multiple SAP paid in its other large deal, the $6.8bn acquisition of Business Objects in October 2007. It’s not out of whack with SAP’s own valuation. The company trades at about 4 times sales, and that’s before any acquisition premium is figured in. Viewed another way, SAP trades at roughly 14 times cash flow, while it is paying 15 times cash flow for Sybase.

LANDesk on the block

Brenon Daly

Contact: Brenon Daly

When Emerson Electric picked up Avocent for $1.2bn last fall, we noted that the acquisition made a great deal of sense as a way for Emerson to get deeper into the datacenter. We also noted that the systems management business that Emerson was inheriting because of Avocent’s earlier purchase of LANDesk looked ‘increasingly out of place.’

No surprise, then, that Emerson has formally begun a process to sell off the LANDesk unit. What is kind of a surprise, however, is the fact that LANDesk is shaping up as a comparatively pricey divestiture. We’ve heard talk of 2 or even 3 times sales for the $150m business. That could get the price back to roughly the $416m that Avocent originally paid for LANDesk back in 2006.

The reason LANDesk is going for a richer multiple than the conventional 2x sales for a divestiture is that there appears to be a number of interested parties for the business. As my colleague Dennis Callaghan outlines in a new report, LANDesk could appeal to virtualization vendors (notably existing partner VMware), hardware providers (notably existing partner Lenovo) and security firms, which might be looking to match Symantec’s pickup of Altiris. (Incidentally, Big Yellow paid about 3.5x trailing sales in its big systems management buy.)

Additionally, the size and stability of LANDesk is also expected to draw interest from buyout shops. We understand that Greenhill & Co, which advised Emerson on the purchase of Avocent, is also handling the planned unwind of LANDesk. Emerson already classifies LANDesk as a ‘discontinued operation’ and plans to have the divestiture done this year.

Sources: a take-private for Double-Take

Brenon Daly1 Comment

Contact: Brenon Daly

The final bidders for Double-Take Software have narrowed to three buyout shops, and a purchase of the file-replication software vendor could be announced within the next two weeks, we have learned. The company said a month ago that an undisclosed bidder had approached it about a possible transaction.

A number of sources have pointed to Vector Capital as the unidentified suitor, adding that the firm is one of the three bidders still in the running. Although we speculated early on that Double-Take’s two main channel partners (Dell and Hewlett-Packard) might be interested, we understand now that there aren’t any strategic bidders currently at the table.

The price couldn’t immediately be learned, but we suspect there won’t be a huge premium for the company, which was trading at $9.36 on Monday afternoon. The reason? Double-Take recently trimmed its sales outlook for 2010, essentially saying it doesn’t expect to grow this year. It recently guided to about $86m in sales for 2010, about 10% lower than it had expected earlier this year. It finished the recession-wracked 2009 with revenue of $83m, down from $96m in 2008.

Even without growth, Double-Take undoubtedly holds some appeal to a private equity (PE) firm. For starters, the company is cheap. It currently sports a market capitalization of just $200m, but nearly half that amount is made of its cash and short-term investments. (The company held $89m in its treasury at the end of the first quarter.)

With an enterprise value of only $111m, Double-Take now garners just 1.3x projected sales. Another way to look at it: even with a decent premium to the company’s current valuation, a buyer could still pick up Double-Take for about 4x maintenance revenue. Small wonder that a few PE shops are still considering a Double-Take takeout.

Where might Symantec shop?

Brenon Daly

Contact: Brenon Daly

After its double-header encryption deals last week, Symantec appears set to return to M&A. Like a number of tech giants, Big Yellow largely shunned dealmaking last year. But the drop-off was particularly notable at Symantec: It spent more than $1bn on acquisitions in both 2007 and 2008, but less than $100m in 2009. We would hasten to add that in the fiscal year that just ended on April 2, Symantec generated $1.7bn in cash flow from operations. That brought its cash stash to more than $3bn.

As to where the company might be shopping, my colleague Paul Roberts in our Enterprise Security Program outlines five areas that make sense for Symantec to buy its way into – as well as who might be of interest in those markets. In a new report, Roberts looks for M&A activity from Symantec in the following areas: threat detection and reputation monitoring, SIEM and vulnerability management, enterprise rights management, database security and endpoint control. All of those areas are a long way from Symantec’s original market of antivirus software.

A final thought on Big Yellow and its possible shopping is that the company actually enjoys a fair amount of goodwill on Wall Street right now. Symantec’s fiscal fourth quarter, which it reported Wednesday, was surprisingly strong for many investors, particularly after rival McAfee had a less-than-stellar first quarter. In fact, on many trading screens Symantec was the only green stock Thursday on an otherwise blood-red day. Symantec shares closed up less than 2%, but that was on a day that saw the Dow Jones Industrial Average plummet almost 1,000 points, or 9%, in afternoon trading.

One sale leads to another at Sophos?

Brenon Daly

Contact: Brenon Daly

As leading indicators go, the recent decisions around Sophos paint a rather bearish picture for the current IPO market. The anti-malware vendor had briefly filed to go public back in late 2007 but then pulled the paperwork as the markets tumbled. We understand that Sophos had lined up banks earlier this year for another run at an IPO, but it ended up selling a majority chunk to buyout shop Apax Partners earlier this week. (Two of the three bookrunners on the most recent lineup were the same as the 2007 prospectus, according to a source.)

A dual-track process typically adds at least a few dollars to the price of a company, since it at least introduces the idea of another buyer (the public market). However, Sophos’ sale to Apax, in our view, comes at a discount to the valuation we would have penciled out for the company. The deal values Sophos at $830m, about 3.2 times trailing sales and 2.7 times projected revenue. Sophos’ stillborn IPO comes at time when other would-be debutants are having to cut terms or shelve their offerings altogether.

Yet somewhat paradoxically, we think the move by Apax actually makes an offering by the security company more likely, at least down the road. For starters, it replaces Sophos’ somewhat cumbersome ownership structure, which didn’t always share the same alignment, with a single owner to call the shots. (For instance, we heard there was a fair amount of dissention inside Sophos over its mid-2007 purchase of Utimaco, which stands as the largest acquisition of a public security company by a private one.)

Also, Apax probably got in at a low enough price that it could make a decent return by taking Sophos public in a year or two, provided the equity markets stay receptive. (We would argue that’s a much more likely exit than a flip to yet another buyout shop.) And finally, there are plenty of banks ready to (at long last) get Sophos on the market. Many of the underwriters have been working with Sophos for more than a half-decade, so it would be just a matter of updating numbers in what has to be a well-worn pitch book.

Sophos is a seller

Brenon Daly

Contact: Brenon Daly

Former IPO hopeful Sophos will stay private (at least for the time being), but will have a new owner, the anti-malware company said. The new majority holder is Apax Partners, having picked up a 70% stake from both TA Associates, which had been a minority shareholder since 2002, and Sophos’ two founders. The purchase put an overall price tag of $830m on Sophos.

The sale comes after much speculation that Sophos, which had filed to go public in November 2007, was once again looking for an IPO. In fall 2009, British media reports indicated Sophos was planning an offering in 2010 that would have valued the company at about $1bn. Instead, Sophos is taking what we would consider a multiple at the low end of the range, even though the company’s size and recent growth rate might imply an above-market valuation.

Sophos indicated it recorded billings of $330m and revenue of $260m for its fiscal year, which ended March 31. On a trailing basis, that works out to just 2.5 times bookings and 3.2 times sales. Assuming Sophos continued growing at a 19% rate for the current fiscal year, it would have finished this year with about $310m in sales. That means Apax is valuing Sophos at just 2.7 times projected revenue.

Other security companies that have danced on and around the public stage have recently fetched much richer valuations, at least in one key measure. Encryption vendor PGP garnered four times trailing revenue in last week’s sale to Symantec. While PGP may or may not have been planning to go public, the most recent security IPO does trade at a notable premium to the valuation Sophos just got in its sale. Unified threat management vendor Fortinet currently commands a $1.25bn market capitalization, which works out to 4.9 times trailing sales.