Category: M&A

A happy New Year

Brenon Daly

Contact: Brenon Daly

Much is made about how the opening days of trading tend to set the tone for the equity markets each year. (If that’s the case, Monday’s strong performance of both the Dow Jones Industrial Average and the Nasdaq Composite Index would indicate a pretty bullish 2010.) And since there is a correlation between the equity markets and the M&A market, we thought we’d note that deal flow in the New Year is also starting strong. The first full business day of 2010 saw big-name acquirers such as EMC and Thomson Reuters both reach for startups.

Actually, the opening flurry of deals in 2010 continues a pickup in M&A that really took hold in the final quarter of 2009. With the US economy growing again in the fall – after a year and a half of contraction – companies started shopping again. (The 12% surge in the Nasdaq in the fourth quarter also undoubtedly helped confidence.) With a few late-2009 deals still to tally, we project spending on fourth-quarter tech M&A will come in at about $55bn. That’s the highest level since the second quarter of 2008 and represents a 45% increase over spending in the fourth quarter of 2008. As for the outlook for the balance of 2010, two-thirds of tech bankers we recently surveyed told us their pipelines are fuller now than they were a year ago.

Quarter-by-quarter M&A totals, 2008-09

Period Deal volume Deal value
Q1 2008 839 $57bn
Q2 2008 719 $173bn
Q3 2008 733 $32bn
Q4 2008 724 $38bn
Q1 2009 659 $10bn
Q2 2009 770 $48bn
Q3 2009 757 $38bn
Q4 2009 784 $55bn

Source: The 451 M&A KnowledgeBase

And the Golden Tombstone goes to …

Brenon Daly

Contact: Brenon Daly

We survey corporate development executives every year to get a sense of their shopping plans for the next 12 months. We’ll have a full report on the survey when we return from our holiday break in early January, but the headline finding is that two-thirds of the respondents expect the pace of M&A at their firms to pick up in 2010, compared to just 5% who see the rate tailing off. We would note that bullishness is echoed by technology investment bankers, who we also recently surveyed. (See our full report on the tech bankers’ survey.)

In addition to getting their outlook for the coming year, we also ask corporate development executives to pick a single deal that stood out to them as the most significant transaction of the year. The 2009 winner? Oracle’s still-pending $7.4bn acquisition of Sun Microsystems. Larry Ellison’s big gamble on hardware received twice as many votes as the second-place transaction, Hewlett-Packard’s reach for 3Com last month. (HP won the award last year for its purchase of services giant EDS.) Third place was claimed by EMC’s aggressive grab of Data Domain.

From our perspective, it’s fitting that Oracle’s purchase gets the coveted Golden Tombstone for 2009. (As an aside, it’s unintentionally accurate to be referring to ‘tombstones’ in connection with deals this year, if just because the M&A market was as quiet as a cemetery.) After all, 2009 has been characterized by transactions that are cheaper but take longer to close than in years past. Oracle, which announced the purchase of Sun in April but still hasn’t gotten full approval for it, is paying just 0.6x trailing sales for the faded tech giant. It was that kind of year for M&A, and one we’ll gladly put behind us. Here’s to a healthy and happy 2010 when we return from a much-needed break.

Golden Tombstone winners

Year Transaction
2009 Oracle’s $7.4bn purchase of Sun Microsystems
2008 HP’s $13.9bn acquisition of EDS
2007 Citrix’s $500m XenSource buy

Source: The 451 Corporate Development Outlook Survey

The market and Meru

Brenon Daly

Contact: Brenon Daly

Having watched at least three of its rivals get acquired in recent years, Meru Networks is now aiming for the other exit: a public offering. The WLAN equipment maker filed its IPO paperwork on Friday for an $86m offering to be led by Bank of America Merrill Lynch, with co-managers Robert W. Baird & Co, Cowen & Co, JMP Securities and ThinkEquity. Meru plans to trade on the NYSE under the ticker MERU. (Incidentally, the company was one we put on our list of IPO candidates for 2010 in our recently published 2010 M&A Outlook – Security and networks.)

If Meru does manage to make it onto the public market, it will reverse the flow of deals in the sector. In recent years, a large publicly traded rival (Symbol Technologies) and two other competing startups (Colubris Networks and Trapeze Networks) have all been acquired. Those trade sales have valued the WLAN equipment vendors at a range of 2.1-3x trailing 12-month (TTM) sales.

We noted a year and a half ago that all of the transactions probably meant that Meru would have trouble finding a buyer, except among public market investors. Not that Meru hasn’t kicked around a possible sale in the past. Rumors have tied it to both Juniper Networks and Foundry. The Foundry relationship seems to have died off since Foundry sold to Brocade Communications. According to Meru’s S-1, Foundry/Brocade accounted for a full 35% of its revenue in 2007, but that level has fallen to less than 10% now.

With Meru aiming to hit the market in 2010, we suspect that it will be hoping to have a stronger offering than publicly traded rival Aruba Networks, which initially priced its shares in its March 2007 offering at $11 each. Although Aruba traded above the offer price for almost a year, it broke issue in February 2008 and has not traded above the initial price since then. That said, the stock is nearing that level, changing hands at about $10.65 in midday trading Tuesday. It has more than quadrupled in 2009. The dramatic rebound in Aruba shares has pushed the firm’s valuation to 4.6x TTM sales. Applying that same multiple to Meru’s $67m TTM sales gives the company a valuation of about $310m.

Tech bankers: Business is back

Brenon Daly

Contact: Brenon Daly

Every year, we survey our investment banking contacts to get a sense of what they anticipate for both their business and the overall technology M&A market in the coming year. The results this year seem to fully indicate that the recession that flattened business – and entire institutions – in 2009 will give way to a busier and more vibrant dealmaking market in 2010. Bankers projected that activity will pick up across virtually every part of the business, including the IPOs and private equity buyouts that had all but disappeared this year.

Altogether, the results show a stunning turnaround from our previous survey. (See our report on last year’s survey.) Of course, 2008’s survey went out when the Nasdaq was trading around 1,550 amid the historic upheaval and blood-letting on Wall Street caused by the credit crisis. As devastating as the crisis seemed at the time, it has actually turned out to be a boon for most. More than half of the bankers responded that those unprecedented changes actually boosted their firm’s opportunities – and they expect to be hiring to handle the additional work they see coming in 2010.

The main reason why the banks see the need to hire is that business has recovered dramatically. When we asked bankers to gauge their current pipeline compared to where it was at this time last year, the recovery was striking. Two-thirds said the dollar value of mandates on the deals they are currently working on is higher than it was in late 2008. In the 2008 survey, half of the bankers said their pipeline was drier. Look for our full report on the survey in tonight’s 451 Group MIS sendout.

Change in number of formal tech mandates

Pipeline volume 2006 2007 2008 2009
Increase 84% 70% 39% 67%
Increase 25% or more 58% 31% 9% 39%
Decrease 4% 13% 34% 19%

Source: Annual 451 Tech Banking Outlook Survey

Kana: bidding while the cash burns

Brenon Daly

Contact: Brenon Daly

The progression from spurned bidder to shareholder activist isn’t all that unusual. But it is unusual when the party smarting is a publicly traded company, and decides to express its agitation through press releases. Yet, that’s exactly how Chordiant Software is venting its frustration over not landing Kana Software, with Chordiant telling the world earlier this week that it plans to vote its shares (amounting to 4% of the total equity outstanding) against the proposed sale of Kana’s operating business to midmarket buyout firm Accel-KKR. Chordiant followed that up on Thursday evening with a new cash-and-stock offer that values Kana higher than the buyout bid.

All of this comes just days before shareholders are slated to vote on Accel-KKR’s offer (the vote is scheduled for Wednesday). Kana’s board continues to recommend that shareholders back the planned transaction, which would effectively carve the business out of Kana and leave only a shell company in its place. We have noted that it’s an imperfect structure, but one that probably serves the fundamentally flawed firm reasonably well. Of course, some shareholders (including Chordiant) don’t agree, and should vote however they want. We would only note that while the two sides argue, Kana continues to burn cash. At the end of its most-recent quarter (ending September 30), the company was down to just $1.8m (it started the year with $7m). While the cash burn is nothing new for Kana, which has lost $4.3bn since its inception, it could become pressing: Kana noted in its proxy that it has a $5.4m debt payment coming due in 2010.

Sailing around the market with Cisco

Brenon Daly

Contact: Brenon Daly

There are a lot of ways to chart the pickup in M&A activity over the course of 2009. In our recently published M&A Outlook, we cover a lot of the empirical indications, including the fact that spending on deals in the second half of 2009 is tracking 50% higher than in the first half of the year, as well as that the median valuation for fourth-quarter transactions is the highest we’ve seen in the year since the credit crisis erupted.

But our favorite way to encapsulate the changes between the climate a year ago and right now isn’t through data but through anecdote. (Of course, there are those who joke that ‘data’ is just the plural of ‘anecdote.’) Last year, we recall Cisco Systems’ CEO John Chambers ominously remarking that the economy was in ‘uncharted waters.’ Cisco is often considered a bellwether for the broader tech industry, and the company has been a particularly active shopper. Over the past five years, Cisco has spent more than $20bn to buy its way into new markets.

Not that Cisco – or any other company, for that matter – was doing much of that in early 2009. Since then, however, the waters have gotten more navigable. That certainty has helped Cisco step back in the market, with a pair of $3bn transactions as well as its $183m pickup of on-demand security firm ScanSafe. We suspect that signals like that may well encourage other corporate buyers to perhaps at least revisit some of the deals that were put on pause earlier this year. Merely working through that backlog could get M&A off to a strong start in 2010.

Microsoft (officially) pals up with Opalis

Brenon Daly

Contact: Brenon Daly

Two months after we first indicated that Microsoft was interested in Opalis Software, the software giant has indeed acquired the runbook automation (RBA) vendor. No terms were disclosed, but when we talked with sources in mid-October, the price being kicked around was $60m. Opalis was thought to be running at about $10m in revenue. We understand that Cowen Group banked Toronto-based Opalis.

The deal, now that it is official, comes after other fellow RBA startups were snapped up. In March 2007, Opsware (now part of Hewlett-Packard) spent $54m in cash and stock for iConclude, and four months later, BMC paid $53m for RealOps. As that wave of consolidation swept through the RBA market, Opalis positioned itself as an independent alternative to the offerings from the system management giants. That said, the vendor had been drawing closer to Microsoft. In late April, the two companies announced a joint technology agreement that saw, among other things, Opalis integrated into Microsoft’s System Center Operations Manager 2007 and System Center Virtual Machine Manager 2008 consoles.

More businesses on the block at LexisNexis?

Brenon Daly

Contact: Brenon Daly

When LexisNexis announced last month that it was selling off its HotDocs business, it got us thinking about other divestitures that the information provider may be contemplating. More specifically, we wonder if LexisNexis is considering reheating its effort to shed Applied Discovery. Not too long ago, we heard rumors that LexisNexis had hired a bank to help it unwind its $95m purchase of the Seattle-based e-discovery startup. LexisNexis picked up Applied Discovery in mid-2003.

According to one source, LexisNexis came close to selling Applied Discovery to the Silicon Valley-based buyout shop for about $70m, but talks collapsed during due diligence. Shortly after that, LexisNexis cut its asking price for Applied Discovery to basically half of the $95m that it originally paid for the company, but a second source indicated that the unit still didn’t generate much interest. The reason? Many would-be financial buyers are put off by the lumpy business in the e-discovery sector. Sales are typically driven by investigations or lawsuits, which can make it difficult to predict. Meanwhile, among the strategic buyers, many of the large information management vendors – including Autonomy Corp, Iron Mountain, Seagate and EMC, among others – have already announced acquisitions of e-discovery players.

Amex buys into the alternative online payments revolution

-Contact Thomas Rasmussen

As the first significant deal that adds online payments technology to a legacy payment platform, American Express’ recent $300m acquisition of Revolution Money essentially amounts to a shot across the bow of eBay’s PayPal and Google’s CheckOut. The relatively rich purchase of four-year-old Revolution Money also stands as the third-largest alternative online payments buy to date, trailing only eBay’s pickups of PayPal and Bill Me Later. We estimate that Revolution Money, which had taken some $100m in venture funding, was running at around $10m-$20m in sales.

The alternative payments market is both large and fragmented, and is likely to see substantial consolidation in the coming years. It is also a space that has had difficulties in establishing a coherent offering, with early efforts ranging from ill-conceived ‘sci-fi-esque’ biometrics offerings to SMS-based payment methods. Until recently, it has mostly been marred by failed startups, poorly executed acquisitions and fire sales. Nonetheless, thanks to the continuing success of PayPal and new alternatives (Google Checkout, among others), as well as the boom in online micro-transactions and an uptick in general online shopping, the sector is again gaining favor, particularly as a way to cut transaction costs.

Looking ahead, we believe Amex’s acquisition of Revolution Money will serve as a wakeup call to other legacy payments vendors as well as financial institutions that might now look to do some catch-up shopping of their own. This inevitable consolidation should serve as good news for some of the established startups in the industry such as mPayy, Moneta, eBillme and Secure Vault Payments, among many others. These firms could well find themselves getting some overdue attention in 2010 as alternative online payments continue to gain currency.

The wisdom of the crowds

Brenon Daly

Contact: Brenon Daly

As pretty much the only buyers at the table right now, corporate development executives’ views go a long way toward shaping the overall outlook for tech M&A. So it seems a fitting time to survey these shoppers in order to get their expectations for deal flow in 2010. The views of the corporate buyers are crucial to understanding deal flow because, collectively, strategic acquirers account for some 85% of the total M&A spending so far this year. (Note: If you are a corporate development officer and would like to take part in our survey, just email me and I’ll send you the link for the survey, which should only take about five minutes to complete.)

Over the past few years, the survey responses have correlated very closely with how deal flow has actually developed. For instance, when we asked corporate development executives last year what they expected to pay for startups in the coming year, nine out of 10 said private company valuations would come down in 2009. (That has certainly been the case this year.) And in our summer survey, we noted a significant increase in M&A appetite among the strategic buyers. That has certainly been the case, too. Spending on deals in the second half of 2009 is running 50% higher than the amount spent in the first two quarters of the year. Again, if any corporate development officers would like to take part in this survey, contact me and I’ll get you the form.