Category: Private Equity

Buying into the social side of HR

Brenon Daly

Contact: Brenon Daly

After three consolidation plays in the fragmented human capital management (HCM) market, private equity-backed rollup Peoplefluent has expanded into enterprise collaboration with the acquisition of Socialtext. Although 10-year-old Socialtext was one of the pioneers of collaboration software (or ‘wikis,’ as they were known in the early days) and did attract some 6,500 users, it struggled to actually put up revenue.

According to our understanding, Socialtext was only generating about $5m in revenue. Peoplefluent – backed by Bedford Funding, whose principals served as executives at ERP rollup Geac – isn’t renowned for paying high multiples. It paid less than 2 times sales for both of its main consolidation acquisitions, 2008’s platform purchase of Authoria and 2010’s reach for Peopleclick. (Earlier this year, it also added a learning management vendor, Strategia Communications.)

Peoplefluent’s move to add collaboration to its HR platform comes almost exactly two years after HCM giant SuccessFactors paid $50m for social enterprise software provider CubeTree. Additionally, we’ve seen salesforce.com combine elements of its acquisition of collaboration software startup Manymoon with its step into the HCM market through its high-multiple purchase of Rypple. And salesforce.com just added another small part to its collaboration offering, tucking in tiny startup Stypi

Franklin Templeton nets healthy return on AboveNet

Contact: Thejeswi Venkatesh

Zayo Group announced the acquisition of fiber network provider AboveNet on Monday, a move that should help the serial buyer expand its fiber footprint geographically. The bid of $84 per share, which values AboveNet at $2.2bn, represents the highest trading price in the company’s history. There was one shareholder that was particularly pleased with the long-mooted sale of the fiber operator: Franklin Mutual Advisers (FMA), which roughly tripled its investment return in AboveNet.

FMA, an operating subsidiary of Franklin Templeton Investments, bought a 21.6% stake in AboveNet for $128m when the company emerged from bankruptcy in 2003. Zayo’s acquisition values FMA’s current stake of 17.6% at $387m, representing a compound annual rate of return in excess of 14% (including the $5-per-share dividend in 2010). That’s a healthy return at a time when equity risk premiums are hovering at about 6%.

Dell adds UTM vendor, but not the one we thought

Brenon Daly

Contact: Brenon Daly

Just days after we reported rumors that Dell was looking to acquire a unified threat management (UTM) vendor, the tech giant did indeed reach for one. However, it wasn’t the one we indicated. Dell said Tuesday that it will be picking up SonicWALL, less than two years after the security company went private in a $717m deal sponsored by Thoma Bravo.

The market chatter last week had Dell adding UTM rival Fortinet. However, even on a rough, back-of-the-envelope basis, a purchase of Fortinet would likely cost Dell at least four times as much as it probably paid for SonicWALL. Early indications are that Dell paid slightly more than $1bn for SonicWALL, while Fortinet garners a market valuation of $4.3bn, and that’s without an acquisition premium.

Dell didn’t release the price for SonicWALL, although it did note that the company generated $260m in trailing sales. The guidance would appear to indicate that SonicWALL was posting rather muted growth. When it went private, SonicWALL said it would do about $230m in sales in 2010. That would imply that SonicWALL only grew 13% in 2011, less than half the 33% rate put up by Fortinet last year. (Further, Fortinet is generating that growth off a significantly higher revenue base, and will top a half-billion dollars in sales this year.)

But in many ways, SonicWALL is a better fit inside the Dell portfolio than Fortinet. For starters, SonicWALL targets SMBs, where Dell traditionally focuses as well. (Although with recent releases, Dell has announced its aspirations for an enterprise foothold.) Both companies go to market largely through the channel, and even share some partners. Dell has actually been reselling SonicWALL for a decade. We’ll have a full report on this deal in tonight’s Daily 451.

Rough start to 2012 as January tech M&A spending drops 70%

Brenon Daly

Contact: Brenon Daly

As the new year starts, tech acquirers have yet to really reach deep to do any deals. In January, aggregate spending on all tech transactions across the globe plummeted to just $3.5bn – the lowest monthly level since the bottom of the recession in February 2009. Compared to the January 2011 total of $11.8bn, the value of deals announced in the just-completed month fell by a whopping 70%. The number of transactions, however, was unchanged, year-over-year, at roughly 325.

A key point to make about deal flow in the just-completed month is that not a single transaction topped a half-billion dollars. In fact, the largest deal in January 2012 (Semtech’s all-cash $494m reach for semiconductor vendor Gennum) would only be the sixth-largest transaction of January 2011. Last year, January featured deals including Qualcomm’s $3.6bn purchase of Atheros Communications – which, at the time, stood as the largest chip transaction in four years – as well as Verizon’s big bet on cloud services with its $1.4bn acquisition of Terremark Worldwide.

The January totals extend a slump that has seen M&A spending sink dramatically below average in four of the past five months. Since peaking at a post-recession monthly record of $40.2bn last August, spending levels have plunged to $8.9bn in September, $14bn in October, just $4.3bn in November and $19.7bn in December.

PE firms play small ball

Brenon Daly

Contact: Brenon Daly

After years of writing multibillion-dollar checks in some of the largest tech transactions, private equity (PE) shops dramatically scaled back their purchases in 2011. The single biggest deal last year (The Blackstone Group’s $3bn take-private of healthcare technology vendor Emdeon) only ranked 15th among the largest transactions in 2011.

It was the first time PE firms haven’t have a hand in at least one of the year’s 10 largest deals since 2008. Even in the recession-wracked year of 2009, one buyout slotted into the top 10. And in 2010, when the economy appeared to be solidly recovering and the credit markets were more welcoming, PE firms accounted for fully three of the 10 largest transactions of that year. But last year, the buyout barons were overwhelmed by their corporate rivals, who are flush with cash.

Survey says: Tech M&A is likely to pick up in 2012

Brenon Daly

Contact: Brenon Daly

After a summer of discontent, the environment for tech M&A in the coming year once again appears welcoming, according to 451 Research’s annual survey of corporate development executives. More than half of the company dealmakers we surveyed indicated they expected to be busier in the coming year than they had been in the previous one. The number who predicted an increase actually ticked up slightly to 56% this year from 52% in our previous survey.

Meanwhile, when we asked about the overall climate for M&A, three times the number of corporate development executives projected it would get better rather than worsen in the coming year (43% vs. 14%). The sentiment is slightly more bullish than the result last year, when actual M&A spending totals rose for the second straight year following the dramatic drop-off during the recession.

The robust outlook for dealmaking in 2012 is even more remarkable when we compare it with the results from a special ‘flash survey’ we sent out in early August. At that time, the equity markets were sliding to their lowest levels in a year as volatility hit its highest level since early 2009. (It was also the time when the US got its AAA credit rating clipped by Standard & Poor’s, a downgrade that had been largely unimaginable before the recession.) Back in August, just one-third (32%) of respondents indicated they would be busier in the back half of 2011 compared with the first half of the year. We’ll have a full report on the survey results – including the outlook for M&A valuations, as well as which deal got voted as the most significant one in 2011 – in tonight’s Daily 451.

Projected change in M&A activity

Period Increase Stay the same Decrease
December 2011 for 2012 56% 30% 14%
December 2010 for 2011 52% 41% 7%
December 2009 for 2010 68% 27% 5%
December 2008 for 2009 44% 33% 23%

Source: 451 Research Tech Corporate Development Outlook Survey

Recent Blue Coat shareholders no longer in the red

Brenon Daly

Contact: Brenon Daly

Anyone who bought shares of Blue Coat Systems over the past half-year breathed a sigh of relief after the recent buyout of the old-line security vendor. Thoma Bravo’s bid of $25.81 for each share means that buyers since May are all above water. (The offer represents a 48% premium over the previous close and is almost twice the price that Blue Coat stock fetched on its own back in August.)

But there’s another longtime shareholder that’s probably plenty relieved as well: Francisco Partners. Recall that the buyout firm, which had previously invested in the company, also loaned Blue Coat $80m to help it pay for its purchase of Packeteer in 2008. Francisco took convertible notes, which came at an exercise price of $20.76. Although that was roughly where the stock was trading in the spring of 2008, it finished out the year in the single digits as the recession deepened.

More recently, Blue Coat had been trading below the exercise price for the past four months, hurt by three consecutive revenue shortfalls and turnover in the chief executive office. But with Thoma Bravo’s take-private, which is slated to close in the first quarter of 2012, Francisco Partners will pocket a tidy return. On paper, the firm will book a $19m profit on the convertible notes, equaling a roughly 25% gain. That’s certainly not the biggest gain Francisco Partners has ever put up, but given that the firm spent a fair amount of time underwater on its holding, it’s not a bad outcome at all. And it certainly beats the return from just plunking the money into the broad market, which declined about 10% over the period.

Numara keeps flowing along

Brenon Daly

Contact: Brenon Daly

Throughout its long and winding 20-year history, the name may have changed for Numara Software, but the business is still the same. The IT service desk management vendor was originally known as Blue Ocean Software, a name that got erased during the three years the company was owned by Intuit. After TA Associates sponsored a carve-out of the business in October 2005, the newly independent company came up with the name of Numara, a play on its former moniker that means ‘new ocean’ in Latin.

Regardless of what the Tampa, Florida-based company has been called, it has consistently thrown off a ton of cash. According to our understanding, privately held Numara runs north of $100m in sales and north of 35% EBITDA margins. Just recently, the company began to put some of that cash to work in M&A.

After two years out of the market, Numara recently reached across the Atlantic to pick up an Estonian mobile device management (MDM) startup called Fromdistance. (The deal was a tiny one, lining up very closely with the terms for a similar purchase by Research in Motion earlier this year. We estimate that RIM paid about $6m for German MDM startup ubitexx, which was generating less than $1m in sales.) And Numara may not be done shopping. We understand that the company is currently looking at a handful of other possible acquisitions and could well shore up a deal in the next few months.

Big money, behind closed doors

Brenon Daly

Contact: Brenon Daly

Who needs to go public when there’s so much late-stage money sloshing around out there? That question hit us in the head this week after two startups announced, separately, that they were each raising $50m in new funding. First, it was marketing automation vendor Marketo saying it pulled in $50m in a new round led by Battery Ventures and then on Thursday, vulnerability management company Rapid7 also drew in that amount from Technology Crossover Ventures.

The latest round for Marketo, which effectively doubles the amount of capital it has raised, is particularly noteworthy. After all, Marketo has seen two of its main rivals track to the public market. Eloqua is currently on file for a $100m offering, while Responsys went public in late April, an offering that raised $79m.

In the case of Responsys, it may well consider itself fortunate that it raised money when it did. The company recently indicated that business through the end of the year is likely to be substantially slower than it had been. The warning knocked the stock about 25% below where it priced in April and half the level it had hit in the summer.

Sterling Partners aids Mosaid

Contact: Thejeswi Venkatesh

Earlier this month, Wi-LAN indicated it would ‘pack up and move on’ if Mosaid Technologies’ shareholders did not accept its sweetened $42 per share unsolicited offer. But in a rather unusual turn of events, it is Mosaid that has moved on. On Friday, the chip technology company announced an agreement with buyout shop Sterling Partners to go private at $46 a share in cash. (Sterling’s bid values Mosaid at about 10 times trailing EBITDA and represents the highest price for the stock in more than a decade.)

Ontario-based Mosaid has many characteristics that make it a good LBO candidate. For instance, it generated $32m in operating cash flow last year. Even more importantly, that cash flow has been fairly predictable thanks to fixed payment agreements with the likes of Hynix Semiconductor, IBM and Samsung. (During the recession-hammered years of 2008 and 2009, Mosaid still generated about the same level of cash from operations.)

And finally, the company has a robust patent portfolio of 2,800 patents. As we have seen in a number of deals recently, IP is increasingly playing a role in M&A, whether it’s the acquisition of Nortel Networks’ patents by a group of companies led by Apple, or the subsequent $12.5bn purchase of Motorola Mobility by Google, the second-largest tech transaction of 2011. Mosaid’s large – and growing – portfolio of patents could well add a bit more to Sterling’s return, when the private equity firm looks to exit this deal.