Category: Private Equity

Buying a dried-up Riverbed

Brenon Daly

-by Brenon Daly, Christian Renaud

Announcing its largest-ever acquisition, private equity (PE) firm Thoma Bravo says it will pay $3.6bn for Riverbed. The take-private of the WAN optimization vendor comes after more than a year of pressure from activist hedge fund Elliott Management. Under terms, Thoma, which has a history of profitably acquiring infrastructure software providers, will hand over $21 for each of the roughly 170 million fully diluted Riverbed shares.

Thoma Bravo is valuing Riverbed at 3.4x the $1bn that the company has put up over the past year. (Sales growth has been underwhelming so far in 2014. Through the first three quarters of the year, Riverbed inched up its top line by 6% – just one-quarter the growth rate from full-year 2013.) The valuation is roughly in line with other recent significant take-privates such as Thoma’s leveraged buyout of Compuware and Vista Equity Partners’ LBO of TIBCO Software.

The primary reason why Riverbed’s growth has stalled – which precipitated the initial unsolicited approach from Elliott – is the considerable changes in market requirements (greater demand for traffic analysis and grooming) and enterprise networking (evolution to cloud-delivered services). A study by TheInfoPro, a service of 451 Research, earlier this year indicated that more customers were planning to cut their spending with Riverbed in 2014 than increase their spending with the vendor. We’ll have a full report on this transaction in tomorrow’s 451 Market Insight.

RVBD spend plan

 

Belden plugs into Tripwire

Brenon Daly

Contact: Brenon Daly

Belden’s acquisition of Tripwire marks not only the company’s largest purchase, but also the richest valuation it has ever paid. Belden is handing over $710m in cash for the security management vendor. That values Tripwire at nearly 5x sales, which is more than twice the multiple Belden has paid in its past half-dozen deals. (For its part, Belden trades at less than 2x sales, despite its shares hitting an all-time high upon the deal announcement.)

A company known primarily for cables and wiring, Belden has inked seven purchases over the past four years as part of a broader effort to get into new markets. Not all of those moves have worked. (For instance, it divested a wireless LAN startup after more than two years on the books. Despite the irony of a wiring provider buying a wireless vendor, Belden actually sold Trapeze Networks for more than it originally paid for it.) Nonetheless, growth in new markets is one of the main reasons why Belden shares have more than tripled since the end of the recession, roughly three times the gain in the broader US indexes.

Still, the pickup of Tripwire is a not-insignificant gamble. Strategically, Belden imagines extending Tripwire’s security, which is currently focused entirely on enterprises, to industrial settings. And financially, Belden is essentially clearing out its coffers to cover the transaction. (It is drawing down approximately $200m on an existing line of credit to help pay for Tripwire.)

And, as noted, Belden is paying up for Tripwire. Terms value the Portland, Oregon-based target at 4.9x sales. For context, Tripwire sold to its current owner – private equity shop Thoma Bravo – for about $225m, or 2.2x sales, in mid-2011, according to our understanding. So one way to look at the three-year period Tripwire was owned by Thoma Bravo is that while revenue didn’t quite double, the company’s price more than tripled.

The primary reason why Thoma Bravo is getting an above-market valuation on its exit is the operational efficiencies that it helped bring into Tripwire. The company is projected to grow in the high teens, which is twice the rate it was growing before being acquired by the PE shop. Maybe more importantly, Tripwire more than tripled its EBITDA margin, to above 30% currently, while also accelerating its growth.

Look for a more detailed report on Belden’s acquisition of Tripwire in tomorrow’s 451 Market Insight.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Webinar: Tech M&A outlook

Brenon Daly

Contact: Brenon Daly

Last spring, respondents to the M&A Leaders’ Survey from 451 Research and Morrison & Foerster accurately predicted a dramatic surge in tech M&A activity. So what do they see coming now?

We’ll take a lively and thought-provoking look at the results from our latest survey in a special webinar on Wednesday, November 5 at 1:00pm EST. To register for the webinar, simply click here.

Among the key findings we’ll be discussing:

  • Nearly half of the respondents expect overall tech acquisition activity, which has been running at a record rate in 2014, to accelerate through the next half-year.
  • The percentage of survey respondents who say the tech M&A market is likely to be busier from now through next spring is three times higher than the 16% forecasting a decline in acquisition activity.
  • The outlook for private company M&A valuations has never been more bearish. A record 34% of respondents project that sale prices for startups will head lower from now through next April, compared with 26% who anticipate prices ticking higher.

Again, the webinar will be held on Wednesday at 1:00pm EST. Registration is complimentary and can be found here.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Survey: no slowdown in record tech M&A pace

Brenon Daly

Contact: Brenon Daly

Even as tech M&A spending sprints along at a record clip in 2014, half of the respondents to the just-completed M&A Leaders’ Survey from 451 Research and Morrison & Foerster expect the pace to accelerate through the next six months. The 48% of survey respondents who say the tech M&A market is likely to be busier from now through next April is three times higher than the percentage forecasting a decline in activity. (451 Research subscribers: See our full report on the M&A Leaders’ Survey.)

Although the bullish forecast in our mid-October survey dropped from the high-water mark of 72% in our April 2014 survey, it essentially matches the level from surveys over the previous two years. For context, however, it’s also important to note that this outlook – with five out of six respondents indicating that dealmaking will either hold steady or pick up – is coming at a record time for tech M&A. Spending on tech transactions around the globe so far in 2014 is higher than the spending during the same period of 2012 and 2013 combined, according to The 451 M&A KnowledgeBase. (451 Research subscribers: See our full report on Q3 M&A and IPO activity.)

Survey respondents were less bullish in their outlook for private company M&A valuations. A record 34% of respondents predicted that sale prices for startups would head lower from now through next April, three times the percentage that said that in our survey just a half-year ago. We would attribute at least part of the deterioration to the fact that there were certainly bigger – and much higher-profile – sales of startups in the early part of 2014. Overall, according to the KnowledgeBase, the first half of 2014 has seen eight of the 10 largest deals announced so far this year, led by the largest-ever VC exit, WhatsApp’s sale to Facebook in February for $19bn.

M&A spending outlook for the next six months

Survey date Increase Stay the same Decrease
October 2014 48% 36% 16%
April 2014 72% 24% 4%
October 2013 50% 43% 7%
April 2013 54% 27% 19%
October 2012 49% 34% 17%
April 2012 59% 33% 8%

Source: M&A Leaders’ Survey from 451 Research / Morrison & Foerster

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

For Symantec, the spinoff is just the start

Brenon Daly

Contact: Brenon Daly

After a decade of uneasy – and ultimately unfulfilling – marriage, Symantec has finally served divorce papers to its ill-matched partner, Veritas. In going solo, Big Yellow will return to its roots as a stand-alone information security company while spinning off the smaller information management (IM) business at some point before the end of next year.

The separation means that Symantec’s long-suffering shareholders will continue to own Veritas, which cost them a record $13.5bn worth of stock nearly a decade ago. (Since the acquisition closed in mid-2005, Symantec stock has returned just 10%, while the Nasdaq has doubled during that period.) Or more accurately, we should say Symantec shareholders will continue to own the lower-valued IM division until it can finally be sold.

There’s little doubt, in our view, that the spinoff is an interim step. It allows the unit to put up a few quarters of stand-alone performance, perhaps even get some growth back in the IM business. But even as it stands, the division generates more than a half-billion dollars of operating income each year. A buyout shop could certainly make the leverage work on a business like that, particularly once it was ‘optimized.’ (Overall, Symantec spends some 36% of revenue on sales and marketing, even as its sales flatline.)

While the IM business is ultimately likely to land in a private equity portfolio, we would note that we heard an intriguing rumor as Symantec was working through this process. The rumor essentially had Symantec trading its IM unit to EMC for its security division, RSA.

On paper, the swap makes sense, allowing each of the tech giants to focus on their core businesses. According to our understanding, however, talks didn’t get too far along because of the valuation (the Veritas business is about twice as big as RSA) and because of the tax hit that the companies would take due to the asset swap. (As it is, the spinoff of Veritas is tax-free to Symantec shareholders.) And now, of course, EMC is under pressure to undertake a corporate restructuring of its own.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Can tech companies wearing sensible shoes be nimble?

Brenon Daly

Contact: Brenon Daly

As the tech giants get more and more gray hair on their heads, they all seem to desperately want to be young again. How else to explain the impetuous plan by the sensible shoe-wearing Hewlett-Packard to separate its enterprise and consumer businesses, with the stated goal of making the two independent companies more ‘nimble?’ Do the architects of the plan somehow think that cutting in half a 75-year-old company will create two businesses in their late 30s?

Remember, too, that about three years ago, HP initially dismissed a similar (but smaller-scale) plan to spin off just its PC business. At the time, executives said HP was ‘better together,’ citing low supply costs, improved distribution and easier cross-selling from the broad HP portfolio.

So why the change of heart that will result in a messy disentanglement taking about a year to implement, costing billions of dollars and resulting in as many as 10,000 additional job cuts? We suspect the fact that HP sales are now 10% lower than when it dismissed that spinoff plan may have something to do with it. (As we noted earlier, HP is basically splitting itself into two companies roughly the size of Dell, which itself had a massive and contested change in corporate structure last year as it sought a ‘fresh start’ through a $24bn leveraged buyout (LBO).)

In addition to HP – Silicon Valley’s original startup – a number of other tech industry standard-bearers have found (or likely will find) themselves under pressure to radically overhaul their corporate structure in pursuit of growth. Some of these have already been targeted by activist hedge funds, while others are still on a watch-list:

  • CA Technologies: Revenue is declining at the 38-year-old company, but it still throws off a ton of cash, trading at less than 10 times EBITDA. Its size and financial profile make it a textbook LBO candidate.
  • EMC: Already under pressure by an activist shareholder to ‘de-federate’ its business, EMC has staunchly resisted calls for change with a variation on the ‘better together’ theme. (But then, so did eBay until recently.) With VMware, it owns one of the most valuable pieces of the IT vendor landscape.
  • Symantec: After a decade of trying to marry enterprise storage and security, a corporate divorce seems likely at some point. (The three CEOs the company has had in the past two years have all kicked around such a separation.) Meanwhile, the topline is flat and Symantec trades at a discount to the overall tech market at just 2.5 times sales.
  • Citrix Systems: In business for a quarter-century, Citrix rode the wave of client-server software to a multibillion-dollar market value. However, despite numerous acquisitions and focus, it has yet to fully capitalize on the next wave of software delivery, SaaS. That business currently generates about 25% of total revenue at Citrix but is only slightly outpacing overall growth, despite industry trends. Citrix stock has been flat for the past four years, while the Nasdaq has nearly doubled during that period.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

As growth flatlines, TIBCO taps out

Brenon Daly

Contact: Brenon Daly

Announcing the largest tech take-private in 16 months, Vista Equity Partners said it will acquire middleware and analytics software vendor TIBCO Software for about $4.3bn. The leveraged buyout (LBO) comes after the one-time highflier spent the previous several months exploring ‘strategic alternatives.’ Even though the LBO values TIBCO at a market multiple of some 4x trailing sales, the exit price is less than TIBCO fetched on its own this time last year. That reflects the difficulty the company has had in finding any growth recently.

Private equity (PE) firm Vista will pay $24 for each of the roughly 165 million TIBCO shares outstanding. At more than $4bn, TIBCO stands as the largest-ever purchase for Vista, more than twice the size of any check the PE firm has written in the past.

At an enterprise value of $4.3bn, TIBCO is going private at roughly 4x its trailing sales of $1.1bn. (Both sales and profit have declined through the first three quarters of TIBCO’s current fiscal year.) The multiple is slightly richer than the 3.6x sales that rival Ascential got from IBM almost a decade ago. For more of a current comp, rival Informatica – which is only a smidge smaller than TIBCO, but is still growing at double-digit rate – trades at roughly $3.7bn market value. Subscribers: Look for our full report on the transaction later on 451 Research.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

As HP looks to set back into M&A market, who’s on its short-list?

Brenon Daly

Contact: Brenon Daly

Now that Hewlett-Packard is once again growing organically, we’re hearing that the tech giant is looking to grow inorganically once again, too. Several market sources have indicated in recent days that HP has pursued a large network platform play, as well as a smaller round-out for its application security portfolio.

Before we look at the specifics of each rumor, it’s worth noting the fact that any acquisition would be a dramatic reversal from the company’s recent stance. Since its disastrous purchase of Autonomy in mid-2011, HP has stepped almost entirely out of the M&A market, announcing just a pair of small transactions. For comparison, IBM has inked more than 30 deals in the same three-year period, according to The 451 M&A KnowledgeBase.

So who is HP supposedly eyeing? Well, both Blue Coat Systems and WhiteHat Security would bring a dash of color to the company.

Of the two rumored deals, we think the larger one – Blue Coat – is less likely, if just because a more measured return to dealmaking after a three-year hiatus would probably play better among investors, who have bid HP shares up to a three-year high. Blue Coat, with its diverse networking and security product portfolio and headcount of more than 1,400, would also pose a number of integration challenges to a company that is still working through the last big transaction it did. Furthermore, it would likely cost HP more than $2bn.

More reasonably, WhiteHat would likely cost HP only about one-tenth that amount and would be a relatively low-risk expansion to the company’s existing portfolio by bolstering its security services. HP already offers application security, a portfolio built primarily via M&A. HP acquired Web app testing startup SPI Dynamics in June 2007, and then added Fortify Software in August 2010. Fortify, which had a relatively strong partnership with WhiteHat before its sale, stands as one of the few recent deals that HP has done that has actually generated the hoped-for returns.

With one divestiture done, will Juniper cut the cord on Trapeze, too?

Brenon Daly

Contact: Brenon Daly

Having largely worked through an internal cleanup of its operations, Juniper Networks is now looking to shed some of those operations. The networking gear provider recently divested its Junos Pulse to private equity newcomer Siris Capital, pocketing an unexpectedly rich $250m for its mobile and network security division. With Junos Pulse off the books this quarter, we suspect that Juniper will now turn its attention to cutting the cord on Trapeze Networks.

The rumored divestiture of Trapeze (if it indeed comes to pass) would unwind Juniper’s $152m purchase of the WLAN gear provider back in November 2010. (Ironically, Juniper picked up Trapeze when it was divested by Belden.) Although Belden actually turned a (slight) profit on its ownership of Trapeze, we doubt that Juniper will come out ahead on any divestiture because Trapeze has lost much of its standing in the WLAN market. (Even Juniper seems to have acknowledged this, inking a rather involved partnership with WLAN rival Aruba Networks last month.)

Juniper’s moves come as the 18-year-old company faces pressure from activist hedge funds to pick up its performance. (Juniper shares have basically flatlined over the past decade, and have underperformed rival Cisco Systems more recently.) So far, Juniper has focused its efforts on its cost structure, cutting more than 400 jobs over the past year and consolidating its real estate holdings, for instance.

Fittingly for a company under scrutiny from Wall Street gadflies, Juniper’s cost savings have been put toward ‘shareholder friendly’ expenses, such as funding an increased share buyback as well as a newly announced dividend program. We would add that Juniper’s cash, which totals almost $4bn on hand, isn’t going toward M&A. The company hasn’t announced an acquisition in 2014. As things stand now, given Juniper’s focus on its financial operations, we could well imagine that the company will be a net seller – rather than buyer – of businesses this year.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

For tech M&A, fortune favors the bold

Brenon Daly

Contact: Brenon Daly

So far in 2014, the top end of the tech M&A market has been a little barren for the buyout barons. In fact, there’s been only one private equity-backed deal among the 20 largest transactions this year, according to The 451 M&A KnowledgeBase. For comparison, in 2013, three of the 10 largest acquisitions involved PE shops.

In most years, financial acquirers generally account for roughly one out of every five dollars spent on tech M&A. But this year, the buyout shops are increasingly finding themselves elbowed aside by corporate shoppers. These newly confident strategic acquirers are (for the most part) enjoying lofty valuations on Wall Street, while also rolling around in the richest treasuries they’ve ever had. (And the debt market stands ready and willing to fund bigger acquisitions, if companies want to draw on that.)

We often say that to do deals, all that’s required is currency and confidence. Both are plentiful for most corporate buyers, which is helping to put overall spending on tech, media and telecom (TMT) transactions on track for record levels. (See our full report on TMT dealmaking in Q2 and the outlook for the rest of 2014.)

The emboldened corporate acquirer is probably best exemplified by Zebra Technologies and its mid-April reach for the enterprise business being spun off of Motorola Solutions. In years past, it wouldn’t have been uncommon for a divested business like this to land in a PE portfolio for a year or two of ‘rehabilitation’ before flipping back to a strategic buyer.

Instead, Zebra – an infrequent acquirer that had never spent more than $150m on a single transaction – decided to step in and buy the business directly. (Never mind the fact that Zebra has to borrow virtually all of the $3.45bn to cover the purchase, or the possible difficulties of integrating and operating a businesses that is about 2.5x the size of Zebra’s existing business.) And how has Wall Street reacted to the uncharacteristically bold dealmaking at Zebra? Shares have tacked on about 25% in value from pre-announcement levels and currently change hands at their highest-ever level.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.