Category: M&A

Less of the same for October M&A

Brenon Daly

With October standing as the worst month for the Dow Jones Industrial Average in more than a decade, we thought we’d see what the market’s rout did to M&A totals. Essentially, October continued the sluggishness that we’ve already seen in the first three quarters of 2008, with M&A falling about one-third from October 2007. (See our full report on Q1-Q3 activity.) And while the drop in dealmaking seems sharp, it pales in comparison to the losses on Wall Street, at least on a relative basis. Consider this: the October declines of the Dow and the Nasdaq (14% and 18%, respectively) account for exactly half of the total losses for both indexes in 2008. Ouch.

Also similar to the first three quarters of the year, big buyers sat out October. Only three transactions valued at more than $1bn were announced last month. (And, we’d be quick to add, one of them – the $2.3bn unsolicited bid for Atmel – has been rejected and, if history is any guide, probably won’t go through.)

Even with the continued bearishness in the M&A markets, the activity in October does offer a glimmer of hope for the return of a vibrant deal economy. At least things didn’t get worse. And if things continue to not get worse, it’s not too much of a stretch to see them starting to get better.

October deal flow

Month Deal volume Deal value Deals worth $1bn+
October 2006 330 $37bn 8 (Google-YouTube, Open Solutions LBO)
October 2007 309 $32bn 5 (Nokia-Navteq; SAP-Business Objects)
October 2008 238 $23bn 3 (CenturyTel-Embarq, unsolicited bid for Atmel)

Source: The 451 M&A KnowledgeBase

Inconsistent currencies

Brenon Daly

Throughout much of the year, the US dollar looked like lightweight paper. A buck basically bought you a loonie (as our northern neighbors call their dollar), and foreign exchange traders were heard shouting jokes about ‘the American peso.’ We noted the weak US dollar as one of the key reasons that total M&A spending by US acquirers dropped by about two-thirds from mid-2007 to mid-2008, while European shopping jumped by one-third (see report).

In the wake of the global financial crisis, however, the dollar has strengthened. To get a sense of that, consider the relative value of the US dollar when two Silicon Valley-based multinational tech giants went on shopping trips to Australia this year. Back when Hewlett-Packard made its play for records management vendor Tower Software in late March, the US dollar bought about A$1.10. A few days ago, when Oracle reached for Haley Limited, $1 bought A$1.60. That’s a lot more buying power for the once-humbled US dollar.

Ad networks: What recession?

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-by Thomas Rasmussen

Akamai just got serious about online ads. It acquired ad network acerno from i-Behavior last week for $95m in cash. (See my colleague Jim Davis’ report for more on this acquisition.) This marks not just a somewhat drastic change in focus for Akamai, but is also an encouraging sign for the remaining online advertising networks. Despite the current economic meltdown, and more specifically the declining revenue and abysmal forecasts from ad giants Yahoo and Google, everybody seems to want a slice of the multibillion-dollar online advertising market.

Including the Akamai transaction, a total of 23 online advertising deals have been inked this year. That is up more than 25% from 17 deals for all of 2007, and just four in 2006. This increase in M&A activity stands in stark contrast to the overall Internet M&A picture, where the number of deals has declined more than 10%.

Moreover, despite highly publicized warnings from VCs about the decline in available venture capital and possible exits, funding has been flowing freely and rapidly to online advertising startups. Some of the many to receive funding recently include mobile ad firm AdMob, which raised $15.7m last week for a total of $35m raised to date; Turn Inc., which raised $15m recently for a total of $37m; ContextWeb, which raised $26m in July for a total of more than $50m raised; social networking ad network Lotame, which raised $13m in August in a series B round for a total of $23m raised; and Adconion Media Group, which closed a staggering $80m in a series C round in February, bringing its total funding to more than $100m.

With IPO markets closed, these startups should all be considered M&A targets. Adconion in particular stands out because of its international reach and large base of 250 million users, 50 million of whom are in the US. It would be a nice fit for one of the large media conglomerates competing for online advertising dominance. And they have shown that they are not afraid of opening the vault to do so. VC and banker sources say funding is likely to continue for the near term since there is still a lot of buyer interest. It is unlikely to suffer the same fate as the social networking funding fad, because some online advertising companies actually make money. As this segment continues to consolidate over the next year, we suspect deal flow will likely eclipse that of the past 12 months. Mobile and video advertising ventures are likely to lead the next generation of online advertising-focused startups.

Select recent online advertising deals

Announced Acquirer Target Deal value Deal closed
October 15, 2008 Technorati AdEngage Not disclosed October 15, 2008
June 18, 2008 Microsoft Navic Networks $250m (reported) Not disclosed
April 29, 2008 Cox Enterprises Adify $300m May 2008
March 11, 2008 Qualcomm Xiam Technologies $32m March 11, 2008
February 5, 2008 AOL Perfiliate Technologies $125m February 5, 2008
November 7, 2007 AOL Quigo Technologies $346m December 20, 2007
September 4, 2007 Yahoo BlueLithium $300m October 15, 2007
May 18, 2007 Microsoft aQuantive $6.37bn August 13, 2007
May 15, 2007 AOL Third Screen Media $105m May 15, 2007
April 13, 2007 Google DoubleClick $3.1bn March 11, 2008
April 30, 2007 Yahoo Right Media $680m July 12, 2007

Source: The 451 M&A KnowledgeBase

Smoothing the spread

Brenon Daly

With the stock market in turmoil, more than a few deals have seen a gulf widen between the current price of a would-be target and its proposed takeout price. So the question becomes: How to smooth the spread? Well, two different approaches – with wildly different results – seem to support the idea of disclosure, with more being better. Wall Street, apparently, is a little skittish these days.

A month ago, JDA Software took the unusual step of issuing a press release to assure Wall Street that it can actually pay for its PE-style acquisition of i2. Originally, JDA was banking on Wachovia to help fund its purchase. But as that bank came undone, Wells Fargo stepped in to join Credit Suisse as the lenders to JDA. That deal, which was launched in mid-August, goes to i2 shareholders a week from Thursday. Meanwhile, i2 shares are currently changing hands at about $14, compared to JDA’s bid of $14.86.

Contrast that clarity with the cloudy situation surrounding Brocade Communications’ planned purchase of Foundry Networks. When Brocade unveiled its ‘Cisco-killer’ acquisition in July, it said it would pay $18.50 in cash plus a sliver of stock for each Foundry share. The networking equipment maker’s stock traded near the bid until a disastrous decision Friday to delay its shareholder vote on Brocade’s offer, citing ‘recent developments.’

While the company may have had its hands tied about what it could say about these ‘developments,’ the ominous move spooked the market. Concerns immediately arose about Brocade being able to pay for the $3bn acquisition, given the tight credit market, as well as the SAN vendor perhaps knocking down its offer price. Shares are now changing hands at $13.36 – almost exactly where they were before Brocade launched its bid three months ago. We’ll see if the initial offer holds up when Foundry shareholders vote on the deal Wednesday afternoon.

Expensive independence

Brenon Daly

It was a rough week all around for stocks (once again), but the decline was especially galling for holders of shares in companies that had earlier attracted unsolicited offers. Two big would-be targets, neither of which is still being hunted, were in the news again this week: Yahoo and SanDisk. And the news wasn’t good.

Jerry Yang and the rest of the Yahoo-ers (at least the ones who survived the 10% job cuts) revealed that business was a bit soft in the third quarter. Sales were stagnant, and the search engine earned only one-third the amount that it did during the same period last year. So much for their go-it-alone plan. You’ll recall that Yahoo repeatedly brushed aside a $31-per-share offer from Microsoft earlier this year. The stock closed Thursday at $12.65, near its lowest level since mid-2003.

Meanwhile, SanDisk shares also hit a five-and-half-year low after Samsung on Tuesday pulled its $5.85bn unsolicited offer for the flash memory card maker. Samsung aired its offer of $26 for each SanDisk share in September, after several months of unsuccessful overtures. SanDisk shares closed Thursday at $9.14. That means the rejection by SanDisk’s board has cost shareholders more than the rejection by Yahoo’s much-pilloried board, at least on a relative basis. SanDisk shares are changing hands at about 65% below Samsung’s offer, while Yahoo stock is trading ‘only’ 59% below Microsoft’s bid.

Fixed on the market

Brenon Daly

Although the IPO market is closed right now, some VCs are nonetheless steering – and steeling – their portfolio companies for a public market payday. Of course, that often means passing up a trade sale, which holds out the appealing prospect of cash on close. But Menlo Ventures’ John Jarve pointed out in his talk at IBF’s early-stage investment conference that those sales can be shortsighted. Consider the case of portfolio company Cavium Networks.

Jarve says Cavium, which makes security processors for F5 and Cisco, among others, has attracted a number of suitors. One would-be buyer floated a $350m offer for the company. Instead, Cavium went public in May 2007. At its peak, it sported a market capitalization of nearly $1.5bn. Even in the midst of the current Wall Street meltdown, Cavium is still valued at $500m.

The Cavium tale sparked a round of (perhaps apocryphal) Silicon Valley chestnuts about companies that also passed on trade sales to remain independent: Cisco allegedly rejecting an $80m offer from 3Com and Google nixing a reported $1bn bid from Yahoo. One we can add to that list is Riverbed. Several sources have indicated that Cisco made a number of serious approaches to the WAN traffic accelerator, but was rebuffed. Riverbed, which at one point was valued at about $3.5bn, currently trades at a $740m market capitalization.

Symantec-Veritas without the strings

Brenon Daly

Where Symantec purchased, McAfee will partner. Having watched its major security competitor get bogged down with a storage acquisition, McAfee has opted for a low-risk partnership to tie its security products with storage. The largest stand-alone security vendor said Tuesday that it has struck an alliance with data management software provider CommVault. The initial integrated product, which will put CommVault’s storage resource management tool into McAfee’s ePolicy Orchestrator console, will be available next year.

With modest integration and no bundled products planned, we would characterize McAfee’s loose partnership with CommVault as ‘Symantec-Veritas lite.’ And the two sides have reason to be cautious, given the struggles Symantec has had with its $13.5bn purchase of Veritas. (Although he continues to back the deal, Symantec CEO John Thompson has said the market considers the combination a ‘purple elephant’ and is uncertain of how to value it.) Since the transaction was announced in December 2004, Symantec shares have lost about half of their value, compared to a 20% decline in the Nasdaq and a slight 5% dip in McAfee stock.

Net effect from Intel’s buy

-by Thomas Rasmussen

It’s a somber 10-year anniversary for 10-Gigabit Ethernet vendor NetEffect. The company was picked up by Intel in a bankruptcy asset sale last week for a bargain $8m. Its technology, along with 30 of its engineers, will be rolled into Intel’s LAN Access Division. NetEffect has burned through some $50m in funding since recapitalizing in 2004. The company, which we once heralded as an innovator and potential leader in 10GigE technology, simply ran out of cash.

One reason for NetEffect’s scrap sale might be the increased competition. Big players like Intel, with its own organic offerings and its tuck-in of NetEffect, and Broadcom, with its $77m acquisition of Siliquent Technologies in 2005, have been crowding an already teeming market. This, coupled with scarce funding and lack of widespread adoption of the technology, makes us wonder what will happen to NetEffect’s surviving former rival startups still trying to stay afloat.

Venture capitalists have thrown hundreds of millions of dollars at 10GigE companies, with little to no payoff. We suspect the wind-down of NetEffect is an indication that VCs have had enough. Tehuti Networks, iVivity, Myricom, Neterion Technologies and Alacritech are some of the many startups in this sector that could potentially feel the net effect from this. In fact, iVivity seems to have quietly hit the switch already; its website is down and its phones are off the hook. Firms that will benefit from this include IBM, Hewlett-Packard, Dell and Hitachi, which are likely to follow Intel’s lead and peruse the bargain bin.

Known funding of select 10GigE players

Company Total funding Last round Status
Chelsio Communications $100m $25m series E (2008) Active
iVivity $60m $10m series D (2006) Missing in action
NetEffect $47m $25m series B (2006) Acquired by Intel for $8m
Siliquent Technologies $40m $21m (2004) Acquired by Broadcom in 2005 for $77m
Silverback Systems $51m $16m series D (2006) Acquired by Brocade Communications in 2007 for less than $10m*
Tehuti Networks Unknown Series B (2008) Active

Source: The 451 M&A KnowledgeBase *Official 451 Group estimate

Marked-down leftovers

Brenon Daly

When Oracle snapped up Primavera Systems last week, we had to spare a thought for the surviving project and portfolio management (PPM) vendors. That thought almost became the start of a eulogy as we saw Primavera’s publicly traded rival get trounced on the Nasdaq and its direct competitor still out on the market seeking a buyer.

Let’s start with the biggest of the big, Deltek Systems. Since the company, which is majority owned by buyout firm New Mountain Capital, went public a year ago, its shares have lost three-quarters of their value. That has reduced Deltek’s market capitalization to just $190m. Deltek also carries about that same amount of debt, along with a stash of roughly $33m in cash. Altogether, Deltek’s enterprise value is around $350m. That for a company that will do about $300m in revenue this year, including approximately $100m in maintenance revenue, while running at a mid-teens operating margin.

Next is Planview, another privately held PPM vendor. The Austin, Texas-based company is roughly the same size as Primavera, running at about $175m. More than a few sources have indicated that Planview has been for sale for some time, but for whatever reason, it hasn’t found a taker. Not that we imagine it would be prohibitively expensive at this point. If Plainview went for the same valuation as Primavera, it would fetch $350m; pegging the purchase price to Deltek’s current multiple would put it closer to $200m. That’s mere pocket change for IBM, which we hear may have been interested in Primavera, a partner company.

Unclipping Click Commerce

Brenon Daly

It turns out that software doesn’t really fit in a toolbox, after all. Illinois Tool Works, which reports third-quarter earnings Thursday, said recently that it plans to divest its Click Commerce division. (With the process just beginning, we don’t expect ITW to say much about the divestiture during tomorrow’s call.) The move would unwind ITW’s puzzling purchase two years ago of the supply chain management vendor. It paid $292m in cash for Click Commerce in September 2006.

ITW is a 96-year-old company that makes everything from commercial ovens to industrial packing tape to arc welders. It has inked more than 50 acquisitions during each of the past two years, spending about $1bn in 2007 and $1.7bn in 2006. And the company is on pace for a similar number of deals this year, having notched 26 buys in the first two quarters. Acquisitions are key for ITW, since the additional revenue picked up represents virtually the only growth at the company. In 2007, its core business expanded just 1.8%.

In announcing the divestiture, ITW indicated that Click Commerce had sales of $67m last year. (That was down slightly from the $74m the company posted in the four quarters prior to the acquisition.) And although ITW hasn’t broken out updated cash-flow figures for Click Commerce, the company has, historically, been a profitable operation. (In the two quarters leading up to the acquisition, Click Commerce had run at a solid 24% operating margin.) We suspect that any number of buyout firms – perhaps those that missed the sale of i2, another big supply chain management company – would be interested in taking a look at the book on Click Commerce.