Category: M&A

Disconnected at Palm

Brenon Daly

Contact: Brenon Daly, Chris Hazelton

Palm Inc has lost a key set of hands. In an SEC filing Friday, the troubled company said that the head of its software and services, Michael Abbott, will be cleaning out his desk by the end of this week. (No word yet if he’ll also have to give back his smartphone.) The departure is significant because Abbott was responsible for building third-party developer support for Palm’s smartphone platform, which has lagged well behind the developer communities for Apple’s iPhone and Google’s Android OS. It also underscores one of the key problems at Palm, which we explored in more depth in a recent report.

Specifically, Palm has precious little to show for its efforts to stay relevant in the mobile world. Here’s our back-of-the-envelope math: the company will spend in the neighborhood of $300m on sales and marketing and another $200m on R&D for the current fiscal year, which ends next month. (The levels are basically annualized totals from the first three quarters of the current fiscal year.) We would also add that they are significantly higher than spending levels at rival vendors. For instance, Palm spends 2.5 times more on R&D (as a percentage of revenue) than Blackberry maker Research In Motion.

Adding together sales and marketing plus R&D spending at Palm, we get about $500m, compared to projected revenue of about $1.1bn. And what does the company have to show for that half-billion-dollar outlay? Palm’s already tiny slice of the smartphone market actually got smaller this fiscal year. And yet, despite that dismal return on investment – not to mention a key executive departure – speculation continues to swirl that Palm will get snapped up. Most often, HTC, Lenovo or even Motorola are named as suitors for Palm. However, in our report, we note key reasons why those vendors wouldn’t be interested. For our money, Dell still seems the most-logical buyer of Palm.

Juniper returns to the M&A table

Brenon Daly

Contact: Brenon Daly

After almost a half-decade out of the market, Juniper Networks is back buying. The communications equipment vendor announced plans last week to hand over ‘less than $100m’ for Ankeena Networks, its first purchase since picking up Funk Software in November 2005. The company declined to be more specific on the deal value, but at least one source indicated that the price for Ankeena was indeed less than $100m, but not by much.

Whatever its final price, Ankeena undoubtedly got a rich valuation, as it essentially launched a year ago. Sales of the company’s software for serving and managing content delivery were fairly small. Ankeena also undoubtedly delivered a rich return for its three backers: Mayfield Fund, Clearstone Venture Partners and Trinity Ventures. The trio put just $16m into Ankeena.

In the four-and-a-half years that Juniper has been sidelined, its rivals have been busy. Ericsson has inked some 17 deals in that period, including the $2.1bn acquisition of Redback Networks. Meanwhile, Cisco has sealed 39 deals in that time, spending more than $40bn. Most observers would chalk up Juniper’s M&A hiatus, at least in part, to the fact that it came up way short on its biggest gamble, the $4bn all-equity purchase of NetScreen Technologies. (On a smaller scale, Juniper also has precious little to show for its $337m cash-and-stock pickup of Peribit Networks, a WAN traffic optimization vendor that we understand was running at less than $15m in sales.)

Realizing a return on NetScreen was going to be difficult from the outset because Juniper overpaid for the security provider. In a transaction that had more than a few echoes of the Internet Bubble era, Juniper paid 14 times trailing sales and more than 50 times trailing EBITDA for NetScreen. And when it tried to make the deal work, Juniper found itself struggling to integrate NetScreen’s firewall product into its core networking line, and was unable to reconcile NetScreen’s indirect sales model with its own direct model. Maybe buying Ankeena is the clearest sign yet that Juniper, which replaced its longtime CEO in September 2008, has finally closed the NetScreen acquisition and moved on.

HP buys big

Brenon Daly

Contact: Brenon Daly

Earlier this week, Hewlett-Packard closed its $3.1bn acquisition of 3Com. It was a significant shot at the company’s new rival Cisco Systems, adding additional networking and security products to HP’s ProCurve portfolio while also dramatically increasing its business in Asia (3Com generates roughly half its sales in China). The deal was announced on November 11, and closed on Monday.

What’s interesting is that HP, which was once a fairly steady dealmaker, has been out of the market since that purchase. Its rivals, however, haven’t been on the sidelines. In the five months since HP announced the 3Com buy, IBM has inked five deals, Dell has announced two transactions and Cisco has picked up one company. Of course, some of HP’s inactivity could be chalked up to its efforts to digest 3Com, which stands as the company’s fourth-largest acquisition. (On the other side, Cisco knocked out a pair of $3bn purchases in just two weeks in the month before HP reached for 3Com.)

But we understand from a couple of different sources that although HP is looking to do fewer deals, they will be larger. The shift has actually been taking place for some time at the company. In 2007, like a number of cash-rich tech giants, HP was basically knocking out a purchase each month. That pace slowed to just five deals in 2008, including the landmark acquisition of services giant EDS. Last year, HP bought just two other companies besides 3Com. It looks like the company, which is tracking to more than $120bn in sales this year, has realized that the big get bigger by buying big.

Nokia browses for an advantage

Contact: Jarrett Streebin

In an effort to increase its appeal in emerging markets, Nokia has bought Novarra, the first of two deals in as many weeks. With the acquisition, Nokia obtains Novarra’s faster and more-efficient browser, which is important in emerging markets where bandwidth limitations exist. Nokia is also playing catch-up with players like Apple and Research In Motion that already have their own browsers.

Nokia ships more than 400 million phones annually, many to customers in emerging markets such as Africa, Asia and South America. Having a fast, low-bandwidth browser like Novarra will enable Nokia to better attract carriers in these regions and with the smartphone craze just starting to take off, the company gains an edge on competitors whose browsers require more bandwidth.

Although the deal value wasn’t released, we understand that Nokia paid roughly four times trailing sales for Novarra. The 10-year-old startup had received $88 million in funding from JK&B Capital, Qualcomm, Fort Washington Capital Partners, Kettle Partners and Colorado Investment Securities, with $50m of this coming in a round in 2007.

This move will also affect Novarra’s rivals such as Opera Software and Mozilla. The impact on Mozilla will be limited because its browser targets 3G smartphones like Nokia’s N900 to provide a rich, unconstrained mobile browsing experience. Opera is currently the market leader in mobile browsing, with more than 50 million active users, many of whom are using Nokia phones. Now, Nokia will have its own browser to compete. Although this will cut Opera’s market share, Vodafone has already announced that it will be preloading Opera on many of its phones in emerging markets. It could be that Vodafone needs a browser of its own, too.

A Double-Take takeout?

Brenon Daly

Contact: Brenon Daly

Never mind the business, somebody has their eye on Double-Take Software. The file-replication software vendor said Monday that it came up short in its first-quarter performance, continuing the struggles that it saw throughout 2009. Last year, maintenance revenue flat-lined, while license sales dropped by one-quarter. And although the first quarter is starting off a bit underwhelming, Double-Take is still projecting that it will grow this year. However, even if the company hits the high end of its estimate of $95m, sales for 2010 will still fall just short of 2008’s level of $96m.

Apparently, that lackluster performance hasn’t dimmed the company’s appeal. As Double-Take was announcing its Q1 miss, it also said – in an ‘Oh, by the way…’ manner – that it had received an ‘unsolicited, non-binding’ expression of interest from an unnamed suitor. No terms were revealed so it’s hard to know, specifically, what’s on offer to Double-Take shareholders. The company says only that the bid is ‘above recent trading prices.’ Does ‘recent’ mean a bit under $9, where shares have been since early February? Or does ‘recent’ also include the period in January when shares changed hands above $10, before the company warned (for the first time) that the quarter was coming in a bit light? On the report, Double-Take stock jumped 15% to $10.05 in Monday afternoon trading.

As to who might have floated the bid, it strikes us that this looks like a private equity (PE) play. If a strategic buyer wanted Double-Take, we don’t see it approaching the company in such a fast-and-loose way. Besides, there are basically only two companies that would make obvious bidders: Dell and Hewlett-Packard. The two tech giants are Double-Take’s main channel partners, with Dell accounting for a full 17% of the company’s revenue on its own. Also, both vendors could presumably benefit from Double-Take’s large customer base of SMBs, which numbers more than 22,000. Of course, an auction could draw out any interested strategic player, so the potential bidders aren’t necessarily limited to HP and Dell.

But as we say, we think this offer came from a buyout shop. And we can certainly understand Double-Take’s attractiveness to a financial buyer. In short, it’s cheap. Even with the stock’s pop on Monday, the company still only garners a market cap of about $220m. And the net cost is even cheaper, because the debt-free, profitable vendor carries almost $100m in cash on its balance sheet. At an enterprise value of just $120m, Double-Take is valued at less than three times its maintenance stream. That’s a valuation that any number of PE firms probably figure they could make money on.

Phoenix sheds FailSafe

Brenon Daly

Contact: John Abbott

Phoenix Technologies announced at the start of the year that it was putting its plans to expand beyond the core BIOS software business on hold, and hired GrowthPoint Technology Partners to find a buyer for its non-strategic technology assets. A short time later, CEO Woodson Hobbs was out the door, followed soon after by CFO Richard Arnold. Ironically, Hobbs was originally hired in September 2006 to turn the company around, and his first task back then was to rebuild the BIOS business after Phoenix had lost its way through diversification. It appears that Hobbs fell into the same trap by putting too much effort into HyperSpace, a hypervisor that was being positioned as the basis for an OS for netbooks. Tom Lacey, who previously worked at Applied Materials Inc and before that Flextronics, took over as CEO in February.

Now a buyer has been announced for the first of Phoenix’s unwanted assets: FailSafe, a theft-loss protection and prevention system for laptops, and the associated Freeze computer locking system. The acquirer is security tools provider Absolute Software and the price tag is $6.9m. (This is Absolute’s second acquisition in five months: last December it spent $9.6m on the assets of Pole Position Software, primarily for the target’s LANrev asset management package). Phoenix is still trying to offload HyperSpace itself as well as the eSupport.com line of online PC diagnostics tools.

Since the need for a new OS to run on netbooks now appears to be fading away, HyperSpace could conceivably be utilized by vendors addressing the desktop virtualization market. However, the largest players here – VMware, Citrix and Microsoft – are working with their own hypervisors and are unlikely to want another. Interestingly, Phoenix has filed a patent-infringement lawsuit against startup DeviceVM, the developer of the SplashTop lightweight Linux OS. DeviceVM has licensing deals in place with netbook and laptop makers Asus, Hewlett-Packard, Lenovo, LG Electronics, Acer and Sony.

New CEO Lacey claims that excellent progress is being made on refocusing Phoenix back onto its BIOS business. At the end of fiscal 2009 (ending September 30), the noncore products made up less than 10% of Phoenix’s $67.7m in revenue, an overall decline of 8% over 2008. That means core BIOS sales are back down to the same level as they were in fiscal 2006, despite the acquisition of direct rival General Software Inc in July 2008. In its most recent first quarter, the company posted revenue of $15.6m (down from $17.4m in Q1 2009) and a profit of $1.1m (including a one-off $7.1m income tax refund). Phoenix has cash on hand of $27.9m.

An exclusive ‘club’

Brenon Daly

Contact: Brenon Daly

The price of admission for a ‘club deal’ just got a bit more expensive. The trio of private equity (PE) firms bidding for Irish e-learning firm SkillSoft recently bumped their offer to $1.2bn, up from the original $1.1bn bid in mid-February. The buyout firms teaming up to take SkillSoft private are Berkshire Partners, Bain Capital and Advent International. According to terms, the trio will be using equity to cover slightly more than half of the purchase price ($680m, or 57% of the $1.2bn transaction).

The planned leveraged buyout (LBO) of SkillSoft is one of only three take-privates by a PE club since January 1, 2008 valued at more than $1bn. (That doesn’t include syndicate purchases of divestitures or other parts of companies, such as the carve-out of Skype from eBay by a quartet of firms.) When credit was flowing freely in 2006-07, multibillion-dollar LBOs were plentiful, which was a primary reason that overall spending on tech M&A in each of those years topped $400bn. In both 2006 and 2007, PE shops accounted for more than 20% of all money spent on tech deals.

The topping bid for SkillSoft comes at a time when overall PE spending is dropping to some of the lowest levels since it began to recover last year. After averaging about $9bn in both of the quarters since the US recession officially ended, the value of deals by PE firms fell to just $6bn in the recently completed first quarter. Incidentally, the decline of PE deal value matched almost exactly the drop-off in overall first-quarter tech M&A spending, which came in at the low end of the range that we’ve tallied in recent quarters. Click here to see our full report on first-quarter M&A.

PE activity

Period Deal volume Deal value
Q1 2010 63 $6bn
Q4 2009 92 $9.9bn
Q3 2009 83 $8bn
Q2 2009 76 $2.8bn
Q1 2009 46 $250m

Source: The 451 M&A KnowledgeBase

Consistently inconsistent M&A in Q1

Brenon Daly

Contact: Brenon Daly

The first quarter is in the books and it’s hard to read much from it, at least in terms of M&A. While the quarter saw more deals announced than any other quarter since the credit crisis erupted, the aggregate spending on those transactions is lingering about one-third below the recent average. In the just-completed quarter, we recorded 841 acquisitions, with a total bill of $31bn. (We should note that nearly one-third of the M&A spending in the quarter came on a single telecom deal, where an Asian operator spent $9bn on mobile businesses in Africa just two days before the end of the quarter.)

Overall, the numbers point to an inconsistent recovery in the M&A market. On the one hand, many of the big buyers were busier than ever. CA Inc, Google, IBM and Oracle (among others) all announced at least three transactions in the just-completed quarter. But on the other side, we also saw a number of deals that continued the worrisome trends that we thought we might have left behind in 2009, with additional scrap sales and low-multiple divestitures in the first few months of 2010. Look for our full report on first-quarter M&A in tonight’s MIS and TDM sendouts.

Recent quarterly M&A activity

Period Deal volume Deal value
Q1 2010 841 $31bn
Q4 2009 822 $55bn
Q3 2009 758 $38bn
Q2 2009 778 $49bn
Q1 2009 663 $10bn

Source: The 451 M&A KnowledgeBase

More on Intersil-Techwell

Brenon Daly

Contact: Brenon Daly

We looked at Intersil’s purchase of Techwell on Thursday, primarily from the perspective of the senseless lawsuits that are swirling around the transaction. But fittingly for the largest acquisition of a US-based chip company since mid-2007, there’s a lot more that’s noteworthy about the deal. (Note: The equity value of the transaction is actually $450m, while the $370m figure in the announcement is the enterprise value.)

For starters, Intersil’s pickup of Techwell, which is expected to close in two months or so, is the sixth deal the chip company has inked in the past year and a half. (In another report, we noted some similarities in a pair of purchases that Intersil did back in 2008.) At $450m, the buy is the largest that Intersil has announced in a half-decade. The acquisition gets Intersil into two new markets: video security surveillance systems, where Techwell gets about 70% of its sales, and automotive displays, which accounts for the remaining 30%.

Also, the planned sale of Techwell represents the second exit at an above-market multiple in just three weeks for Technology Crossover Ventures (TCV). A late-stage investment firm, TCV owned chunks of both Techwell and RiskMetrics Group, which sold to MSCI Barra for $1.55bn at the beginning of March. TCV holds nearly 4.3 million shares of Techwell, according to the latest 13F filing with the SEC, meaning the firm stands to enjoy a $79m payday when the deal closes.

Ambulance chasing in tech M&A

Brenon Daly

Contact:  Brenon Daly

Here’s another sign that tech M&A is getting more active: plaintiffs lawyers have come slithering back into the process. Instead of chasing ambulances, these lawsuit-loving lawyers are now following deal flow. Their tactic: before the ink is even dry on an M&A announcement, threaten an investigation into possible fiduciary breeches by the board at the selling company. To most, the pesky threats are little more than extortion.

In recent weeks, plaintiffs lawyers have taken aim at Chordiant Software for agreeing to sell itself for $161.5m to Pegasystems. (Never mind that Chordiant shareholders are getting 50% more than another suitor offered for the faded CRM vendor just two months ago. And they’re getting it all in cash.) But even more absurd is the decision by a handful of law firms to target Techwell’s decision to sell itself to Intersil in a transaction that gives Techwell a $450m equity value, or an enterprise value of $370m.

Intersil’s bid (on an enterprise value basis) works out to a rather rich valuation of 5.9 times Techwell’s 2009 sales and 4.2x projected 2010 sales, according to Intersil. (We would note that’s roughly twice the valuation that the market currently gives Intersil.) Terms call for Intersil to hand over $18.50 in cash for each Techwell share, a price that represents a relatively rich 50% premium over the previous day’s closing price.

Moreover, Intersil’s bid roughly matches the highest point Techwell shares ever hit on their own, which came back in November 2006. The offer is twice the price at which Techwell went public in mid-2006 and roughly three times the level where shares were changing hands just a year ago. Yet that outperformance hasn’t stopped at least five different law firms from charging that Techwell may not have done right by its shareholders.