Category: M&A

Startup scrap sales

With new funding difficult to come by, many cash-burning startups are finding that they have no choice but to take a scrap sale. Those desperate deals cut M&A spending on VC-backed startups in the second half of 2008 by nearly three-quarters over the same period in 2007. From July to December last year, 100 venture-backed startups got acquired, for a total bill of just $3bn. That compares to 153 startups sold for a total of $11.1bn during the same period in 2007.

And we’ve seen more of these types of deals so far this year. Oracle, SAP, Barracuda Networks and Quest Software, among other large technology buyers, have all purchased companies for less than the money raised by the startups, according to our estimates. Consider the specific case of Mirage Networks. The network access control (NAC) vendor raised some $40m before discovering that NAC wasn’t really a market after all. (The eight-year-old company generated an estimated $5m in sales last year.) Trustwave picked up Mirage for some $10m, we estimate. Meanwhile, Mazu Networks will have to hit all of its earn-outs to make its investors whole again. About a month ago, Riverbed Technology said that it would pay $25m upfront for the network security vendor, with a possible $22m earn-out. That’s actually not a bad outcome for unprofitable Mazu, which we understand was burning about $1m each quarter. And yesterday, Netezza picked up the assets of data-auditing and protection vendor Tizor Systems for $3.1m; Tizor had raised $26m from investors.

VC-backed tech startups M&A

Month 2007 deal volume 2007 deal value 2008 deal volume 2008 deal value
July 23 $2.3bn 21 $994m
August 18 $1.2bn 16 $497m
September 25 $1.7bn 16 $642m
October 39 $2bn 13 $487m
November 27 $3.1bn 20 $346m
December 21 $788m 14 $56m
Total 153 $11.1bn 100 $3bn

Source: The 451 M&A KnowledgeBase

SAP goes (Cog)head hunting

Brenon Daly

Contact: Brenon Daly

Having put a bit of money into Coghead about two years ago through its venture wing, SAP picked up all of the platform-as-a-service vendor in a wind-down sale late last week. Coghead drew in $11m in two rounds from backers El Dorado Ventures, American Capital Strategies and SAP Ventures. American Capital and SAP Ventures joined in Coghead’s last round, raised in April 2007, which came a little more than a year after El Dorado provided a $3.2m first round.

We had heard late last year that Coghead, originally known as Versai Technology, was trying to land another round. However, like so many other startups these days, the company wasn’t having success in raising new capital. Indeed, earlier this month, my colleague Dennis Callaghan noted that Coghead had been quiet for several months. He speculated that the company might fit well into the portfolio of open source business process management vendor Intalio. Coghead actually embedded Intalio’s process engine, and the two startups share SAP Ventures as a backer. (Overall, SAP Ventures has some 38 active investments.)

Instead of landing with Intalio, the Coghead assets are headed to SAP. And what will the German giant do with them? While much of the speculation has portrayed the purchase as SAP buying its way into the cloud, a more tangible indication is the ‘situational applications’ that Coghead announced at last summer’s SAP conference, Sapphire. With Coghead’s technology, users could build and manage applications that integrate with SAP. Given SAP’s proprietary language and platform, allowing customers to build applications or Web front-ends to those applications could go some distance toward getting SAP a return on its investment.

‘Little brothers’ eyes get big

Brenon Daly

Contact: Brenon Daly

As virtually all investors are acutely aware, public companies get their valuations reset every trading day. And with the Nasdaq having been cut in half since the highs on the index in November 2007, those valuations are universally being reset lower. That has created a somewhat counterintuitive situation where public companies sometimes trade at a substantial discount to their privately held counterparts, despite typically being larger and certainly more liquid and transparent investments.

That pricing discrepancy has spurred some of the ‘little brothers’ to make runs at their publicly traded brethren. Last year, we saw HireRight taken private after a year on the Nasdaq by privately held US Investigations Services for $195m, or about twice the sales of the human capital management (HCM) vendor. On a larger scale, Sophos reached for German endpoint encryption vendor Utimaco in a private-public transaction last summer.

What other private company might be viewing the Nasdaq as a shopping list? We’ve heard that software-as-a-service (SaaS) roll-up nGenera recently ‘broadened its horizons’ to also include public companies. The vendor, which we understand did roughly $50m in sales in 2008, has raised some $50m from investors including Hummer Winblad Venture Partners, Foundation Capital and Oak Investment Partners. It has already inked six acquisitions.

Our understanding is that nGenera is looking to add HCM or even sales compensation management technology, which it sells as part of a larger on-demand offering. In addition to being attracted to the discount valuations of public companies, nGenera is also eyeing Nasdaq-listed targets because they are typically more mature than startups and would have more customers to add to nGenera’s existing roster of some 300 enterprise clients.

nGenera’s acquisition history

Announced Target Deal value Target description
May 21, 2008 Talisma Not disclosed SaaS customer service automation
March 5, 2008 Iconixx Not disclosed On-demand talent management HR software
November 29, 2007 New Paradigm Group Not disclosed Research company
October 3, 2007 Industrial Science Not disclosed Business simulation software
September 13, 2007 Kalivo Not disclosed On-demand collaboration provider
May 7, 2007 The Concours Group Not disclosed Research and executive education firm

Source: The 451 M&A KnowledgeBase

Gaming for consolidation

-Contact Thomas Rasmussen

Once considered largely recession-proof, the videogame industry continued its breakdown last week. As part of the ongoing fallout, UK-based Eidos Interactive was picked up for a bargain last Thursday on the same day that Chicago-based Midway Games filed for Chapter 11 bankruptcy. Eidos was acquired for $124.4m by Japan’s Square Enix, which, while successful on its home turf, has long desired a larger global presence. We would note that the purchase by Square Enix was the 11th gaming acquisition so far this year – more than twice the number during the same period in both 2008 and 2007. And with falling valuations and desperate investors deep underwater, we have a feeling that we will see more consolidation soon, with large players involved.

One such major acquirer that has not been coy about its M&A intentions is Disney. The entertainment behemoth has been making large inroads in gaming partly through acquisitions, and on a recent conference call addressing its future in gaming, the company said that attractive strategic acquisitions could be in the cards this year. So what might Disney buy? Longtime partner THQ, which has been responsible for the majority of Disney-themed games over the years, is a likely candidate. The Agoura Hills, California-based company has struggled over the past year, watching its market capitalization plunge more than 90% from its 52-week high to just $180m.

But a more interesting – and game-changing – scenario is Disney’s possible pickup of Electronic Arts (EA). The once-soaring company, which used to be an extremely active acquirer itself, could be ripe for the taking. EA’s current market cap is around $5.2bn, down from a 52-week high of $20bn. Disney currently has almost $4bn in cash and a market cap of $33bn. It clearly has the means, and let’s not forget that this is the same company and the same management that spent $7.4bn three years ago to acquire Pixar and cement an overnight leadership in computer animation. We estimate that EA could be had for slightly more than what Disney paid for Steve Jobs’ baby, representing a 50% premium over its current value.

Real deal for Virtual Iron?

Brenon Daly

Contact: Brenon Daly, Rachel Chalmers

Several sources, both from industry and financial circles, have indicated that server virtualization startup Virtual Iron Software is nearing a deal to sell to a strategic buyer. The name at the top of the list? Oracle, which has a Xen-based hypervisor (OVM), but lacks management tools. Virtual Iron would bring Xen management.

Another name that has surfaced is Novell. A year ago, the company handed over $205m for PlateSpin, which was its largest virtualization acquisition and one that valued eight-year-old PlateSpin at roughly 10 times its revenue. Virtual Iron would fit well with Novell’s virtualization efforts as well as with its open source leanings (Virtual Iron is based on Xen).

Sometimes viewed as a ‘down-market VMware,’ Virtual Iron sells primarily to SMEs through its channel. The Lowell, Massachusetts-based company has raised some $65m in funding since its founding in 2003. Backers include Highland Capital Partners, Matrix Partners, Goldman Sachs Group and strategic investors Intel Capital and SAP Ventures.

We understand that Virtual Iron had somewhat ‘frothy’ expectations after Citrix paid a half-billion dollars for XenSource in mid-2007. However, sources say Virtual Iron won’t get anywhere near the valuation of XenSource. In fact, most folks have doubts that the company will even sell for the amount of VC dollars that went into it.

Buyout barons go big, then go home

Brenon Daly

Contact: Brenon Daly

After totaling about $100bn in both 2006 and 2007, the aggregate value of acquisitions by private equity (PE) firms dropped to $27bn last year. And the way 2009 is starting out, we’re certainly looking at another down year for leveraged buyouts (LBOs). So far this year, we’ve seen just half the number of financial deals that we saw during the same period in each of the past two years, and spending has plummeted. The largest LBO so far this year is a mere $60m.

Obviously, the dealmaking climate has changed dramatically over the past three years for the buyout barons, who were once able to draw enough cheap credit to pay top dollar for some technology properties. On occasion, PE firms were able to outbid strategic buyers for companies, even though corporate buyers should be able to wring out more cost savings not available to buyout shops, which (theoretically) should allow them to pay more.

To get a sense of just how far valuations have plunged, compare the price that Chicago-based PE shop Madison Dearborn Partners paid for CDW in May 2007 with the current valuations of VARs that are still publicly traded. (We were thinking about that last week because Insight Enterprises lost half of its value when it said it would have to restate earnings going back a decade.) In its $7.3bn buyout, CDW went private at 1x trailing 12-month (TTM) sales and about 15x TTM EBITDA. In contrast, both Insight and PC Mall currently trade at just one-tenth the price-to-TTM-sales multiple (0.08x sales for both companies) and about one-fifth the price-to-TTM-EBITDA multiple (2.3x for Insight and 3.2x for PC Mall.)

PE deal flow

Period Deal volume Deal value
January 1 – February 17, 2009 20 $149m
January 1 – February 17, 2008 36 $879m
January 1 – February 17, 2007 44 $9.8bn

Source: The 451 M&A KnowledgeBase

Cisco: not a common-sense shopper

Brenon Daly

Contact: Brenon Daly

Through both direct and indirect cues, Cisco Systems’ John Chambers has created the impression that he’s about set to start wheeling a shopping cart up and down the Valley, grabbing technology companies with abandon. Folks who anticipate a dramatic return of Cisco to the M&A market have been busy putting together a shopping list for the company. (As has been well reported, the networking giant has plenty of pocket money; it current holds some $29bn of cash, and just raised another $4bn by selling bonds.) Most of the names on the list are ones that have been kicked around for some time.

For instance, fast-growing Riverbed Technology tops the list for some people. Indeed, Chambers approached the WAN traffic optimizer at least twice before the company went public in 2006, according to a source. We understand that talks ended with Riverbed feeling rather disenchanted with the giant. Other speculation centers on Cisco making a large virtualization play, either reaching for Citrix or VMware. The thinking on the latter is that Cisco would actually buy EMC, which sports an enterprise value of $21bn, to get its hands on the virtualization subsidiary. And last year we added another name to the mix, reporting that Cisco may have eyes for security vendor McAfee.

There’s a certain amount of logic to all of the potential acquisition candidates. At the least, speculation about them is defensible since they are all rooted in common sense. The only hook is that Cisco isn’t a ‘common-sense’ shopper. That’s not to say it isn’t an effective acquirer. Cisco very much is a smart shopper, and we’d put its recent record up there with any other tech company. What we mean is that Cisco’s deals are anything but predictable.

For instance, Cisco was selling exclusively to enterprises when it did an about-face nearly six years ago and shelled out $500m in stock for home networking equipment vendor Linksys. And it got further into the home when it followed that up with its largest post-Bubble purchase, the late-2005 acquisition of Scientific-Atlanta for $6.9bn. (Although word of the deal for the set-top box maker leaked out, few people would have initially put the two companies together.) Similarly, WebEx Communications wasn’t on any of the Cisco shortlists that we saw before the company pulled the trigger on its $3.2bn purchase of the Web conferencing vendor. But what do we know? Maybe some folks out there not only called one or two of those deals, but also hit the unlikely trifecta. If so, maybe you could email us to let us know – and while you’re at it, could you pass along some numbers for lottery picks?

Informatica: Wheeling and dealing in the Windy City

Brenon Daly

Contact: Brenon Daly

It appears that the Second City is a first stop for M&A at Informatica. The data integration company picked up Chicago-based startup Applimation for $40m on Thursday. And there’s continuing speculation that Redwood City, California-based Informatica will reach for the Windy City’s Initiate Systems for a master data management platform. So, in addition to being (in the words of Carl Sandburg) the ‘Hog Butcher for the World/ Tool Maker, Stacker of Wheat/[and]… City of the Big Shoulders,’ Chicago is emerging as a bit of a data dealer.

Of course, there’s another Chicago connection to a possible Informatica deal, one that has the company on the sell side. We have speculated in the past that Oracle might make a play for Informatica to shore up its data quality and data integration business. How does the city figure into that rumored pairing?

As has often been recounted, Oracle CEO Larry Ellison was raised by his adoptive parents on the hardscrabble South Side and very briefly attended the University of Chicago. Shortly after dropping out and founding the company that would eventually go on to become Oracle, one of Ellison’s first hires at the fledgling firm was a young programmer, who had studied at the University of Illinois, for the Chicago office. The person hired was Sohaib Abbasi, who spent 20 years at the database giant before leaving to head up Informatica.

Seven down, five to go for VeriSign

-Contact Thomas Rasmussen

After accounting for a dime of every dollar spent on M&A in 2008, divestitures appear likely to be a thriving business again in 2009. They accounted for 11% of the total M&A spending last year, up from 7% in 2007. And respondents to our annual Corpdev Outlook Survey said they were twice as likely to expect the pace of divestitures to increase than decrease this year. This is especially true for larger companies, some of which have overindulged on M&A throughout the years.

In the world of tech divestitures, there is no better example of this than VeriSign. The naming and encryption giant has been working toward selling off billions of dollars worth of properties that ousted CEO Stratton Sclavos picked up during his multiyear shopping spree. The company announced its first divestiture of 2009 last week, the sale of its European messaging division 3united mobile Solutions. That move follows the sale of its remaining stake in Jamba in October 2008 and the divestiture of its inCode communications and post-pay billing divisions in November and December, respectively.

For those of you keeping score, VeriSign has now completed seven deals, with five still to go. But as is becoming grudgingly apparent to the company and many others in the same position, this is easier said than done. The current economic environment is not exactly ideal for divestitures or spinoffs. And shedding the remaining parts, especially its bloated communications and messaging divisions, has proven to be quite a challenge for the company since they most likely command a much higher price tag, likely in the hundreds of millions of dollars. VeriSign says there are strategic buyers, but the closed credit market and general economic anxiety are severely hampering potential deals.

A chronicle of VeriSign’s seven divestitures

Date Acquirer Unit Note
February 2009 Sinon Invest Holding 3united Mobile Solutions Acquired for $66m in 2006
December 2008 Convergys Post-pay billing business
November 2008 Management buyout inCode Wireless Acquired for $52m in 2006
May 2008 MK Capital Kontiki Acquired for $58m in 2006
April 2008 Melbourne IT Digital Brand Management Services business Sold for $50m
April 2008 Globys Self-care and analytics business
June 2007 Sedo.com GreatDomains.com business

Source: The 451 M&A KnowledgeBase

AVX looking to buy again

Brenon Daly

Contact: Brenon Daly

A year and a half after inking the largest deal in its history, electronic components maker AVX is mulling a return to the market. CEO John Gilbertson told investors at the Thomas Weisel Partners Technology Conference on Monday that he’s considering acquisitions that would bolster the company’s specialty business, including defense, medical or aerospace. Gilbertson added that any deal would be small, likely in the range of $30-50m.

The CEO also said he wouldn’t be paying anywhere close to the multiple he paid in AVX’s largest deal, the $231m all-cash purchase of American Technical Ceramics (ATC) in June 2007. In that transaction, AVX paid 2.6x trailing 12-month revenue for ATC, in part because it had to outbid at least three other parties. (Thomas Weisel banked ATC.)

Since announcing that acquisition, shares of AVX – a dividend-paying company that is majority owned by Kyocera – have lost 40% of their value. The company currently has no debt, with $527m in cash and equivalents, and sports an enterprise value of about $1bn. That’s just 0.6x the $1.6bn in sales that AVX recorded in 2008. Gilbertson said that’s more the valuation he’d expect to pay in any deal he’d do these days.