Category: M&A

Mellanox buys Kotura for its interconnects

Contact: John Abbott, Tejas Venkatesh

New workload demands from large-scale Internet datacenters are driving M&A activity around interconnects, which are required to move large virtual workloads from server to server. Mellanox Technologies is the latest vendor to buy in this market, announcing on Wednesday an agreement to acquire Kotura for $82m in cash. Mellanox plans to use Kotura’s technology and patents to build end-to-end interconnects for datacenters, supporting 100Gbps Ethernet protocols.

Kotura designs, manufactures and markets application-specific silicon photonics circuits. Silicon photonics technology promises to provide a low-cost, high-performance means of connecting standard system modules together into more fluid pools of system resources. Nine-year-old Kotura raised $39m in venture capital funding from ARCH Venture Partners, ComVentures and other firms.

Mellanox will pay $82m in cash for Kotura, and expects to assume approximately $8m in equity awards. While respectable, our understanding of the price-to-sales valuation for Kotura does fall below what we estimate Lightwire received in its $271m acquisition by Cisco. (Subscribers to The 451 M&A KnowledgeBase can view our estimated revenue for Kotura here and for Lightwire here.)

Demand for datacenter interconnect vendors appears to be growing, as evidenced by a handful of relatively rich exits announced in the past two years. Intel is particularly interested in this market, having reached for Fulcrum Microsystems, Cray’s HPC interconnect hardware assets and QLogic’s InfiniBand assets.

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Altera moves into power management with $134m Enpirion buy

Contact: Tejas Venkatesh

FPGA designer Altera has announced the acquisition of power management chipmaker Enpirion for $134m in cash ($141m including the assumption of debt). The deal should bolster Altera’s FPGA systems by reducing board space and improving power management.

Enpirion makes power system-on-a-chip DC-DC converters that enable greater power densities and lower noise performance compared with their discrete equivalent. The 12-year-old target, which originated as a spinoff of Bell Labs, raised $77m in several rounds of funding from Canaan Partners, Columbia Capital and other firms. Enpirion is expected to generate $20m in revenue this year and $35m next year. The transaction values Enpirion at 7x this year’s sales.

The deal comes nearly a year after wireless semiconductor giant Qualcomm bought programmable power management chipmaker Summit Microelectronics for an estimated $100m. The chip world’s constant pursuit of Moore’s Law results in higher performance, but also creates complexity in power management. These acquisitions are aimed at mitigating that problem.

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Increasing number of partnerships in the DCIM sector

Contact: Rhonda Ascierto, Tejas Venkatesh

The niche datacenter infrastructure management (DCIM) software sector is small, but is expected to grow quickly. It hasn’t yet yielded much in the way of M&A, but that could change as there are several potential acquirers that have an interest in this growing market. However, partnerships are likely to be the preferred means of growth for large DCIM vendors.

DCIM helps managers track and analyze information about their datacenters’ operational status, assets and resource use (space, power, cooling, etc.) So far, there have only been a handful of acquisitions because large DCIM suppliers have managed to rapidly develop capabilities organically. But big IT and systems software companies that have remained on the sidelines to date may make strategic moves into the DCIM market.

In contrast, large DCIM providers are likely to choose partnerships as their preferred route to growth. We expect many partnerships by leading DCIM suppliers to round out their offerings, since no single DCIM product offers all features. Market leader Emerson Network Power, for instance, has already led the way in partnering by announcing significant partnerships with IBM and Joyent. We’ll take a closer look at this emerging sector, including potential acquirers and market-size forecasts, in a forthcoming report. This week, we also have our annual Uptime Institute Symposium , which will highlight the rapid changes in the datacenter industry.

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An infrequent shopper, Box buys Crocodoc to spiff up documents

Brenon Daly

Contact: Alan Pelz-Sharpe, Brenon Daly

Though likely a small deal, Box’s acquisition of Crocodoc is nonetheless significant in that it underscores the heavily funded startup’s ambition to serve as an enterprise platform rather than just product. Crocodoc provides HTML5 (originally it was an Adobe Flash service) rendering, annotation and viewing functionality for the cloud. It’s a very commonly used OEM service boasting more than 100 customers to date, including Facebook, SAP, Yammer, LinkedIn and, intriguingly, Dropbox.

Originally the firm provided free stand-alone tools, but in the past few months began to offer an Enterprise API option that allows developers to embed Crocodoc into Web applications. Traditional rendering tools have been designed with small numbers of on-premises power users in mind. On the other hand, Crocodoc began with ambitions to be a commodity cloud service, making its technology – in theory, at least – a good fit for Box.

Box is one of the hottest startups around at the moment, with huge expectations attached to the eight-year-old company. (In a round of funding late last year, for instance, investors valued Box at $1.2bn, according to our understanding.) The expectations have been fueled in part due to the roughly $280m in funding the company has received to date.

For its part, Box is using the money to pivot from the rapidly commoditizing market of file sync/share to a broader enterprise collaboration platform. To date, Box has done most of that repositioning organically. The company hasn’t announced an acquisition since October 2009. For comparison, in that same three-and-a-half-year period, rival Dropbox has inked seven acquisitions. We’ll have a full report on the transaction in our next Daily 451.

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TripAdvisor busy buying in 2013

Contact: Brian Satterfield

After a few slow years of M&A activity, online travel reservation services provider TripAdvisor has kicked its dealmaking into high gear in 2013. In the first five months of the year alone, the company has already acquired four companies, equaling its total number of transactions over the past three years combined.

TripAdvisor’s most recent move came yesterday when it reached into Spain for vacation housing rental classified ads website Niumba.com, an acquisition that complements the company’s core business model. On May 2, the company bolstered its cruise booking capabilities when it bought the talent and technology assets of three-year-old CruiseWise, which had taken in only $1.6m in venture funding. Nearly one-third of TripAdvisor’s 17 deals have occurred since the company spun off from former parent Expedia and began trading on the Nasdaq in December 2011.

This M&A surge comes at a time when many of its competitors are absent from the market. Travelocity hasn’t inked an acquisition since 2009, and TripAdvisor’s former parent Expedia has also been reluctant to make deals, with just two recorded purchases in the past three years.

Despite TripAdvisor’s moves, deal volume in the online travel sector is down nearly 45% so far in 2013 compared with the same time period in the previous year. In fact, TripAdvisor alone has been responsible for exactly half of all transactions in the sector this year.

After 25 years as a public company, BMC gets so-so exit in take-private

Brenon Daly3 Comments

Contact: Brenon Daly

After almost a year of agitation by an activist hedge fund, BMC Software has agreed to sell itself to a group of private equity (PE) buyers for $6.9bn. The take-private of the IT systems management giant, which is the second-largest tech PE deal since the end of the recent recession, will end a quarter-century of public trading for BMC. The offer values the company at a fairly conventional, ho-hum multiple, reflecting the struggles BMC has had in finding any growth.

At $6.9bn, the bid from the consortium – made up of Bain Capital, Golden Gate Capital, GIC Special Investments and Insight Venture Partners – values BMC at 3.2x trailing sales and just 10x trailing EBITDA. As a mature company, BMC throws off a lot of cash, generating some $700m in EBITDA on $2.2bn in sales annually. The relatively rich margin prompts the question of how the company’s new PE owners will be able to boost BMC’s already high cash flow.

The consortium has offered $46.25 per share for BMC. That is only slightly above the level where BMC was trading on its own before hedge fund Elliott Management started its campaign to ‘unlock shareholder value’ at the company. (Further, the price is less than where BMC shares changed hands on their own from late-2010 to mid-2011.) Elliott ended up with a nearly 10% stake in the company as part of its campaign.

Coming just three months after the proposed PE-led management buyout of Dell, the take-private of BMC has a decidedly different structure than most recent PE deals. For starters, it is large – nearly twice the size of other recent tech LBOs and, in fact, it trails only Dell’s $24bn buyout on the list of largest post-recession PE deals.

Additionally, it marks the return of the so-called ‘club deal’ where PE firms team up to take on bigger game. Those deals were relatively frequent before the 2008-09 recession tightened the availability and rates for debt, but fell out of favor recently. Of the five take-privates of US publicly traded tech companies announced in the past two years valued at more than $1bn, four of those have been done by single PE shops, with only one club deal, according to The 451 M&A KnowledgeBase.

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Checking the pulse of health IT

Ben Kolada

Contact: Ben Kolada

Healthcare IT is alive and well, as evidenced by the emergence of new consumer technologies, exceptionally high valuations and investments by some of the largest old-line technology vendors. New regulations, advances in sensor technologies and ‘big data’ analytics are driving many aspects of this market for both consumers and enterprises.

New devices that track fitness, sleep and other personal health metrics are driving adoption of healthcare IT by consumers. Nearly every new wearable technology product being introduced offers some health-monitoring component. The consumer healthcare IT market is already moving from hopeful hype to valuable reality, with Jawbone recently reportedly paying more than $100m for BodyMedia. BodyMedia is Jawbone’s third acquisition; all were announced this year and all focused on healthcare.

For enterprises, Cerner’s $50m acquisition (excluding $19m earnout potential) of bootstrapped employee healthcare management software vendor PureWellness shows the variety of businesses that can make money in enterprise healthcare IT. And consolidation in the health information exchange (HIE) sector continues to go off for about 10x sales. Meanwhile, ad-supported electronic health record (EHR) startup Practice Fusion is widely expected to be considering an IPO soon. The company’s growth is attributed in large part by government initiatives incentivizing medical practices to adopt EHRs.

As for investments, Oracle recently participated in the $45m second tranche of Proteus Digital Health’s series F financing (which brought the round’s total to $62.5m). Proteus offers an ingestible sensor, used by patients to monitor internal health and by clinicians to monitor clinical trialists’ drug dosing. The plummeting cost of genome sequencing has led to a rise of big-data bioinformatics startups hoping to help make sense of the mountains of genetic data. Startups such as Bina and Spiral Genetics have recently raised capital from traditional VC firms.

Descartes drains the bank

Contact: Tejas Venkatesh

Supply chain management vendor Descartes Systems Group is shelling out $33m of its own and its creditors’ money to acquire relatively small KSD Software Norway, which provides customs and transportation management software (KSD does just about $10m in annual recurring revenue). Although a bit of a financial stretch, the deal nonetheless makes sense, since KSD’s software will further help Descartes’ shipping customers navigate the complex European compliance market, which is comprised of diverse regulations, languages and systems.

To pay for the $33m transaction, Descartes is drawing $13m from its treasury (which represents one-third of its total cash balance as of January 2013), as well as $20m from a line of credit. In March, Descartes entered into a $50m credit agreement with Bank of Montreal that includes a $48m revolving facility that can be drawn on to accommodate future M&A activity. For the time being, the KSD buy effectively halves Descartes’ ability to acquire additional companies with this facility.

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A single topping bid skews April’s tech M&A spending totals

Brenon Daly

Contact: Brenon Daly

The value of tech transactions announced across the globe in April more than doubled from last year, boosted by a topping bid in what would be the largest tech deal in a half-decade. Overall, tech acquirers spent some $32.8bn on 253 transactions in April, according to The 451 M&A KnowledgeBase.

However, last month’s spending was heavily skewed by DISH Network’s $25.5bn offer for Sprint Nextel. The satellite television provider, in a highly unusual move, is looking to derail the majority sale of Sprint Nextel to Japanese telco SoftBank. That transaction, which was announced last October, valued a 70% stake of Sprint Nextel at about $20bn.

One point to make about the concentrated deal flow: SoftBank’s bid for Sprint Nextel represented about 61% of total announced spending in October, while DISH’s offer represents 78% of all announced April spending. Excluding that blockbuster transaction, spending dropped to just $7.3bn – about half the spending in April 2012 and less than one-third the level of April 2011.

Further, in another sign of weakness last month, the number of announced acquisitions sank to just 253, representing a double-digit percentage decline compared with the same month of the two previous years. April’s paltry deal count continues the year-over-year declines in monthly M&A volume that we have seen in every month so far in 2013.

2013 activity, month by month

Period Deal volume Deal value % change in spending vs. same month, 2012
April 2013 253 $32.8 Up 129%
March 2013 227 $5.2bn Down 76%
February 2013 249 $47.7bn Up 296%
January 2013 305 $10.7bn Up 155%

Source: The 451 M&A KnowledgeBase

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Dell’s software dreams hit hard reality

Brenon Daly

Contact: Brenon Daly

As one indication of the distraction posed by the planned $24.4bn take-private of Dell, consider the blizzard of SEC paperwork coming from the company. Just in the past month, Dell has put in more than a dozen separate filings related to the planned management-led buyout (MBO). Amid all of the proxy amendments getting papered and chatter about who’s in and who’s out as bidders, it’s easy to lose sight of the fact that Dell (the company) is still doing business.

Of course, the company is doing business on a smaller scale, with Dell reporting high-single-digit revenue declines. Much of that slide is, rightly, attributed to the industry-wide slump in PC sales, which still account for about half of Dell’s total revenue.

But a more complete view of the company shows that while the box business continues to face pressure, the software division has yet to pick up the growth. While it may not be declining like the rest of Dell, the hoped-for boost in the business has yet to materialize. Software sales at the company, which still account for less than 3% of total revenue, are flatlining.

That’s a disappointment, given that Dell is now $5bn into its software shopping spree. It has acquired steadily and broadly, building its portfolio around information management, security and systems management. Much of the company’s software IP that it acquired – from the identity and authentication technology picked up with Quest Software to AppAssure’s backup software to the systems management tools from KACE Networks – got updated and highlighted at an event earlier this week in San Francisco.

Yet, despite all of Dell’s efforts (both organic and inorganic) to boost its software business, the division is stuck at $1.5bn or so in sales. Clearly, there’s more work for Dell to do in that unit.

If it needs a model, Dell can look across to IBM, a onetime box company that has successfully bought and built a software business. Big Blue’s $25bn software business hums along at twice the margins of its other major divisions. Further, software was the only division at IBM to actually post growth in 2012. Whatever the outcome of the proposed MBO, Dell could certainly use a contribution like that from its software group.

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