Category: M&A

Informatica’s shy M&A

Ben Kolada

Contact: Ben Kolada

Those merely glancing at the headlines of Informatica’s press releases would see that on Wednesday the company unveiled the latest version of its cloud-integration PaaS product, Cloud Spring 2013. However, only by reading further would an interested party see that the company has also quietly acquired cloud process automation vendor Active Endpoints. This isn’t the first time Informatica has been shy with its M&A announcements, but recent financial results could give the company the confidence to be much louder with its future acquisitions.

Informatica’s previous small tuck-in of Data Scout only came to light with the launch of Informatica Cloud MDM in September 2012 and the subsequent release of Informatica Cloud Winter 2013. Perhaps that deal didn’t deserve significant attention, as it cost Informatica just $6m.

In fact, with the exception of Heiler Software, Informatica’s dealmaking since 2011 has involved mostly small, sub-$10m tuck-ins. Its median deal size from the beginning of 2011 to today (including Heiler Software) is just $7m. That compares with a median deal size of $55m for the 11 transactions it announced before then.

The turn toward smaller acquisitions, and hiding some of them in product announcements, could be explained to a degree by the unfolding economy in Europe. Europe’s struggling economy eventually hit home and weighed heavily on Informatica’s Q3 2012 profit.

Although Europe is still experiencing economic turmoil, Informatica seems to have been able to cushion the continent’s effect on its top line. After a downturn in profit in the third quarter, the company recently released results that showed better-than-expected revenue in the fourth quarter. (However, net income still came in below the year-ago period.) If future results continue to play to Informatica’s favor, we could see the company becoming more boisterous with its M&A announcements in the future. We’ll have a longer report on Informatica’s acquisition of Active Endpoints in our next Daily 451.

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Xyratex acquires Lustre IP from Oracle

Contact: Tejas Venkatesh, Peter ffoulkes

Xyratex has announced a fairly rare deal with the acquisition of some of Oracle’s assets. Specifically, Xyratex is picking up the intellectual property related to the Lustre file system from Oracle, which the database giant itself obtained as part of its Sun Microsystems buy. Having already made significant investments in Lustre-based high-performance storage systems, the move helps Xyratex stabilize the Lustre community, and thus strengthen its product strategy.

The deal is a natural fit for Xyratex following its purchase of Lustre-based file storage management systems vendor ClusterStor in November 2010. ClusterStor CEO Peter Braam, the original developer of Lustre, joined Xyratex as part of the transaction and remains with the company today.

Xyratex is trying to build a reputation for itself as a leading storage systems provider. To do that, the company is leveraging its expertise in high-performance storage systems, for which Lustre is an appropriate parallel file system technology. Xyratex generated sales of roughly $1.2bn for the 12 months ended November 2012. For its part, Oracle divests a business that it hadn’t been investing in anyway.

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Opera’s cautious move into video optimization

Ben Kolada

Contact: Ben Kolada

Coinciding with its fourth-quarter earnings release, mobile Web developer Opera Software has announced the acquisition of mobile video optimization startup Skyfire Labs for $50m in cash and stock, with an earnout potentially tripling that price. The deal is a strategic combination – bringing together Skyfire’s carrier-focused mobile video optimization offerings with Opera’s mobile browser products – but its conservative structure suggests that Opera isn’t yet confident enough to put all of its eggs into the video optimization market.

Using an enterprise value of $50m (Skyfire had $8m cash on its balance sheet), the purchase – Opera’s largest ever – is valued at 12.2x trailing revenue. However, if Skyfire’s sales live up to expectations, its price-to-projected revenue valuation would be a more palatable 2.9x. Architect Partners, which helped Skyfire raise its $8m series C round, advised the company on its sale. Skyfire had raised $41m in venture capital. (We’ve made our M&A KnowledgeBase record on the transaction, which includes full financial details and round-by-round funding information, freely available here.)

Besides the $50m upfront payment, Opera is on the hook for an earnout of up to $105m in cash and stock. We’d note that although Opera also just announced a $100m credit facility, it could elect to pay $79m of the earnout in stock.

Opera is no stranger to earnouts, using them in all six deals we’ve recorded for the company, but the sheer size of this earnout suggests that the company isn’t fully confident in the video optimization market’s potential. And rightfully so – nearly every video optimization vendor we know of has seen total revenue flatten over the past few years, and many are anxiously seeking exits. (For a longer report on the mobile video optimization market, click here.)

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Corsair acquires streaming audio systems provider Simple Audio

Contact: Tejas Venkatesh

Its IPO plans may not have materialized, but high-performance hardware designer Corsair is continuing to add to its product capabilities. In its first-ever acquisition, Corsair has reached for Simple Audio, a maker of streaming systems that enable consumers to remotely listen to music stored on computers and mobile devices. With audio being an integral part of gaming, the deal adds complementary audio products to Corsair’s stable of headsets, speakers and memory modules.

Corsair should also be able to use its worldwide distribution channels to drive sales of Simple Audio’s products. Terms of the transaction were not disclosed but the target described it as a ‘multimillion-dollar’ deal. According to a press release from Young Company Finance, which tracks and reports on early-stage high-growth companies in Scotland, Simple Audio generated about $2.1m in revenue for the nine months ended September 2012. The company only started selling its products in January 2012.

Corsair designs high-performance DRAM modules and other gaming peripherals for personal computers, with a focus on gaming hardware. The low-margin DRAM business accounts for more than two-thirds of its revenue. The company was on track for an IPO before pulling its paperwork in May 2012, citing poor market conditions. For the year ended March 2012, Corsair generated a top line of $480m, with a gross margin in the mid-teens.

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Go Daddy the trendsetter

Ben Kolada

Contact: Ben Kolada

Shortly after acquiring accounting startup Outright Inc, GoDaddy.com announced that it has picked up mobile website creation startup M.dot for an undisclosed amount. With these two deals, the domain name registration and Web hosting giant is becoming a bit of a trendsetter in its M&A strategy. We’ve been predicting a trend of mass-market hosting providers moving beyond providing simply Web hosting to offering more services for their small business customers.

M.dot provides a smartphone application that enables iPhone users to design and develop mobile websites without any coding. The company, less than a year old, had raised $700,000 in funding from Archimedes Labs, FLOODGATE Fund, SV Angel and angel investors. The deal makes sense since more and more people are more often accessing mobile, rather than fixed, websites.

With M.dot, Go Daddy further reinforces its desire to become a service provider, rather just another website hoster. Usually a pair of acquisitions of small startups wouldn’t merit much attention, but Go Daddy’s dealmaking sets the stage for a trend we expect to see more of – mass-market hosting companies buying their way into services. We’re working on a longer report on this trend that will be published soon.

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In tech M&A, it’s go big or go home

Brenon Daly

Contact: Brenon Daly

Tech buyers aren’t actually doing much buying so far this year, but when they close the deals, they have been big purchases. At least that’s the early read on deal flow so far in 2013. To put some numbers on the activity: Through the first five weeks of this year, the number of announced transactions by tech buyers around the globe was running about 15% lower than the comparable level in either 2011 or 2012.

However, the total spending from January 1-February 8 hit a whopping $55bn, which is higher than we would typically see for an entire quarter. Indeed, the year-to-date total is 2.5 times higher than the $22bn recorded for the same five-week period in the two previous years combined.

The surge in spending is being led by a flurry of big-ticket purchases. So far in 2013, we have tallied eight transactions valued at more than $1bn, up from just one in the same period in 2012 and four in 2011. Topping this year’s list, of course, is the proposed $24.4bn buyout of Dell, which stands as the largest announced tech deal since mid-2007. Also of note, Liberty Global reached across the Atlantic for Virgin Media Group in a $16bn acquisition and Oracle announced the $2bn purchase of networking vendor Acme Packet.

As is evidenced by those transactions, however, the activity at the top end of the market is hardly what we would call precedent-setting. (The Dell buyout – with the cash and equity participation of a company founder, plus a $2bn loan from Microsoft – is hardly a model for other take-privates.) Below those mega-deals, we aren’t seeing many signs of strength in activity that could sustain a recovery in tech M&A for the full year. Keep in mind, too, that we’re coming out of 2012, a year where we saw the value of tech transactions drop 20% from 2011 to end even slightly below the level of 2010.

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salesforce.com ‘connects’ with EntropySoft

Brenon Daly

Contact: Matt Mullen

Announcing its first acquisition in five months, salesforce.com has reached across the Atlantic for Paris-based startup EntropySoft. The eight-year-old target had raised just $3.5m in a single round of funding. EntropySoft produces perhaps the most complete set of enterprise system connectors in the marketplace. These bits of technology allow the interoperability of data between management platforms, and have found their way into many Web content management, enterprise content management and enterprise search platforms.

While connectors will never be seen as ‘sexy’ technology, they are a fundamental underpinning of many integration strategies for vendors and provide a stable income for those that create and maintain them. So why would salesforce.com, a company that will put up about $3bn in revenue this year, want a stable if unexciting income stream? The truth is that it doesn’t.

What it wants, from our view, is EntropySoft’s technology. Specifically, salesforce.com wants the ability to make greater inroads toward positioning CRM as the single repository for enterprise information. Having the predominant connectivity stack as part of its toolkit makes that process simpler. It allows, for example, much easier exposition of content from legacy systems to the CRM repository and the platform that salesforce.com has built atop it with Force.com and Site.com.

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Silver Lake’s two very different elephants

Brenon Daly

Contact: Brenon Daly

Silver Lake has placed its bet, and it’s a big one. As noted, the planned $24.4bn take-private of Dell is the largest tech leveraged buyout (LBO) since the end of the recession. It’s also twice the price of Silver Lake’s previous mega-LBO, the $11.3bn club deal for SunGard Data Systems.

As we look at the two mammoth transactions, they don’t line up very closely at all. For starters, they belong to different eras: SunGard was an early, prelapsarian private equity (PE) transaction, while Dell comes as the credit markets have only recently returned to health after the worst economic recession in several generations.

Further, the two companies find themselves exiting the public market with very different outlooks for their business. SunGard has been riding the steady trend of business services, while Dell has been taking steps to catch emerging trends but still relies on PC sales for more than half its revenue.

The separation between the pair of companies is clear when we look at their financials: Unlike Dell, SunGard was growing at the time of its LBO, not to mention the fact that it ran at a 28% EBITDA margin compared with about 8% at Dell. (SunGard also got valued at twice the price-to-EBITDA multiple that terms give to Dell.)

Finally, we would note that since the Silver Lake-led LBO, SunGard has acquired some 45 companies. The steady M&A, along with organic growth, has seen SunGard bump its top line from about $3bn when it went private eight years ago to about $4.5bn now. We highly doubt that Dell will put up that kind of performance, at least not right away. There’s a lot of work to do at Dell.

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Once indelibly on the market, Dell looks to go private

Brenon Daly

Contact: Brenon Daly

In the third-largest tech leveraged buyout (LBO), Dell will end a quarter century as a public company in a $24bn take-private led by Silver Lake Partners. The private equity firm will be joined by Michael Dell, who is maintaining a significant minority stake in the company that he will continue to lead once it goes private. The LBO comes after Dell has struggled for much of the past half-decade to recast its business away from the rapidly diminishing PC market.

As part of that shift, Michael Dell returned as CEO to his namesake firm in early 2007 and (somewhat belatedly) began an M&A spree that eventually totaled some 20 transactions with a tab of $10bn. The acquisitions got Dell into virtually every part of the tech landscape, including IT services (Perot Systems), security (SecureWorks, SonicWALL), networking (Force10 Networks), storage (Compellent, AppAssure) and infrastructure software (Quest Software).

However, the acquisitions and other strategic shifts that Dell has made have yet to show up in the company’s financials. Dell, which just wrapped its fiscal year, is likely to post revenue that’s nearly 10% lower than the previous year. The company’s operating income has dropped by about one-third.

Since Michael Dell returned to the corner office six years ago, shares of the company have lost about half their value. Rightly or wrongly, Wall Street still views Dell – which gets half its revenue from PC sales – as a low-value ‘box maker’ rather than a strategic supplier of IT products and services. In the end, Dell is exiting the market at just one-quarter the value it once commanded.

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Oracle sets its sights on networking, reaches for Acme Packet

Brenon Daly

Contact: Brenon Daly

After consolidating huge swaths of the software landscape, Oracle has turned its attention to networking with a landmark acquisition. The company will hand over about $2bn in cash for Acme Packet, which Oracle hopes will allow it to capture more business with service providers and enterprises as networks look to deal with higher-level traffic like voice and video in which Acme specializes. Acme – which gets about three-quarters of its revenue from product sales and the remaining one-quarter from maintenance and support – counts about 1,900 service providers and enterprises as customers.

However, Acme has run into difficulties recently. Sales dropped almost 10% through the first three quarters of 2012, and the company has found itself running in the red after years of profitable operations. Before Oracle’s bid, Acme shares had dropped more than 20% over the previous year, underperforming nearly all of the company’s beaten-down networking rivals. Even reflecting the premium, Oracle is acquiring Acme at just half the level that Acme commanded on its own as recently as mid-2011.

Not that Acme is ending its six-and-half-year run as a public company on the cheap. Oracle will hand over $29.25 for each share of Acme, or an enterprise value of $1.7bn. That works out to 5.9x Acme’s trailing sales, which is roughly inline with most of Oracle’s other big-ticket purchases. However, we would note that the 5.9x valuation is more than twice the median valuation for the 50 largest transactions over the previous year, according to The 451 M&A KnowledgeBase.

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