Category: Private Equity

Cut the CDN already, InterNap

Ben Kolada

Contact: Ben Kolada

We’ve long covered InterNap Network Services as both a potential target and a datacenter services vendor with disappointing earnings. With what’s likely to be another underwhelming quarter (the company reports Q3 results after the bell today), we take yet another look at what can be done to save this barely floating ship.

At this point, InterNap has got to unload some of its non-core assets. The company’s IP services segment, made up of interconnection and CDN services, is dragging on its total revenue (revenue from this segment fell 8% last year). However, interconnection is among the core services for hosting providers, so we’d suggest just divesting its CDN assets. Now may in fact be the best time to start weighing this option, given recent positive developments in the CDN sector. Akamai Technologies, the largest CDN provider, reported earnings yesterday that showed revenue grew 11% in Q3 from the year-ago period. And earlier this month, Japanese telco KDDI announced that it was taking an 86% equity stake in CDNetworks in a deal that gave the target an implied equity valuation of $195m. Even though growth had stalled at Seoul-based CDNetworks, the company was still able to command a 2x price-to-sales valuation (which stands in stark contrast to mostly disappointing valuations in the CDN sector).

Cutting some of the fat from InterNap’s business could make the company more palatable to prospective acquirers. However, the lack of growth is likely to prevent interest from most telcos. Instead, at this point buyout shops may be the most interested acquirers. Not only does InterNap have some of the characteristics PE firms prefer (it has very little net debt and consistently generates healthy cash flow), the company’s price is still within reach of some of the larger firms. Applying a simple 30%-per-share premium would put its price in the ballpark of $400m. For comparison, last year we saw financial firms announce a trio of deals each valued at $400m or more.

Renaissance plays politics

Brenon Daly

Contact: Brenon Daly

It must be election season. That’s what struck us when we saw earlier this week that Renaissance Learning went ahead and accepted a buyout offer that valued the online education vendor at about 10% less than an unsolicited bid. To our ear, some of the material in the proxies filed in connection with the $455m leveraged buyout could very well have come from a campaigning politician. The deal closed earlier this week.

Consider the language that the company used in laying out why shareholders should follow the lead of the company’s cofounders, who controlled some 69% of the equity, and back the initial offer from buyout firm Permira: The deal would be ‘more favorable’ to the employees and the broader community than the unsolicited bid from rival company PLATO Learning. (In addition, Renaissance said PLATO’s offer would take longer and be less likely to close, in their view.)

The concern, presumably, is that there would be far more overlapping employees if the two companies were merged, resulting in more job cuts than if Renaissance were taken private and largely left to run as it had been running. Who knows, maybe if PLATO took the company over, the combined company would start with cuts in the executive ranks. If that were the case, the cofounders of Renaissance would go from majority owners to unemployed.

Don’t get us wrong. We’re all for not contributing to the already intractably high unemployment rate in the US. But as a public company, Renaissance has a fiduciary responsibility to all its shareholders, not just the ones in its hometown. It’s worth noting that Renaissance is incorporated in its home state of Wisconsin, rather than the typical location for incorporation, Delaware. (Roughly half of US companies, including PLATO, are incorporated in Delaware.) So that may go some distance toward explaining why the company made ‘jobs and community’ a part of its pitch.

Big Blue’s recent shopping spree

Brenon Daly

Contact: Brenon Daly

After a slow start to the year, IBM has dramatically picked up the pace – and the spending – in its M&A program. Big Blue only announced its first deal of 2011 in late March, and then was out of the market for nearly a half-year. But in the past two months alone, it has announced four deals. And each of the purchases, according to our estimates, was valued in the hundreds of millions of dollars.

Since late August, IBM has acquired analytics and visualization software vendor i2 Group, an analytics firm focused on financial services called Algorithmics, security management specialist Q1 Labs, and – just last week – HPC pioneer Platform Computing. Although IBM only released the value of one of those transactions, we estimate the collective tab on the two-month shopping spree is in the neighborhood of $1.5bn.

The purchases come as IBM shares have been trading around their highest-ever levels. So far this year, Big Blue stock has tacked on some 27%, while the Nasdaq Index has basically flat-lined. IBM will give its latest check-up to Wall Street after the closing bell today, with investors looking for third-quarter earnings of about $3.22 per share on sales of some $26.3bn. Ahead of the release, the stock was trading in-line with the broad market.

A renaissance of PE interest in Renaissance

Brenon Daly

Contact: Brenon Daly

In 2010, PLATO Learning went private in a relatively straightforward process that took just two months from Thoma Bravo’s announcement of the leveraged buyout (LBO) of the online education vendor to the close of it. Now, privately held PLATO is drawing out – and making more expensive – the LBO of fellow online education provider Renaissance Learning. PLATO has been part of a bidding war for Renaissance that has been playing out since mid-August.

In the original offer, buyout firm Permira planned to acquire Renaissance, which has been public since 1997, in a deal valued at $440m. (Somewhat unusually, terms call for Permira to pay one price for Renaissance’s common shares that trade on the Nasdaq while paying a lower price to the cofounders of the company, who control 69% of the equity.) PLATO then topped Permira’s opening bid a week later.

Earlier this week, Permira raised its offer, as did PLATO. However, the board continues to support the Permira bid – even though it values Renaissance at $16m less than the offer from PLATO. The reason? The cofounders don’t want to sell to PLATO. Other shareholders, who represent the remaining 31% of Renaissance equity, will have a chance to vote on Permira’s offer on October 17

Forget the rebound, many companies see double dip

Brenon Daly

Contact: Brenon Daly

According to many big tech acquirers, the rest of 2011 is shaping up to look an awful lot like 2009. From forecasts for declining valuations to indications of a dramatically more conservative approach to M&A, there was a bearishness in the responses to our special midyear survey of corporate development executives that hasn’t been seen since we were mired in the Great Recession. (See the full report.)

And while the responses to our most recent survey may not have hit the same lows of two years ago, many views began to approach those gloomy levels. In any case, it was a dramatic reversal from the relatively robust forecast given at the beginning of 2011. Taken altogether, the responses to our most recent survey indicate that there’s a growing concern about a recessionary ‘double dip’ that threatens to stall dealmaking for the rest of the year.

Just one-third (32%) of the corporate development executives we surveyed last month indicated that they expected their company to pick up the pace of M&A in the second half of 2011, down half (52%) from those who predicted an acceleration for full-year 2011 in our survey back in December. Meanwhile, the number who projected a slowdown more than doubled to 18% from 7%. Another way to think about it is that nearly one out of five people told us that their company won’t be as busy in the remainder of the year as it was in the first half of 2011.

Projected change in M&A activity

Period Increase Stay the same Decrease
Mid-2011 for remainder of year 32% 50% 18%
December 2010 for 2011 52% 41% 7%
December 2009 for 2010 68% 27% 5%
December 2008 for 2009 44% 33% 23%

Source: The 451 Group Tech Corporate Development Outlook Survey

Ness gets a scant sendoff

Brenon Daly

Contact: Brenon Daly

Three-quarters of Ness Technologies shareholders have backed the planned $307m take-private of the IT services vendor, clearing the way for the sale to Citi Venture Capital International (CVCI) to close by the end of the month. CVCI acquired nearly 10% of Ness in early 2008 and first offered to pick up the whole company in July 2010, according to the proxy filed in connection with the proposed deal.

Last summer, CVCI indicated that it would be looking to pay $5.50-5.75 for each Ness share it didn’t already own. Three financial buyers who also got involved in the bidding last fall indicated that they would be prepared to top that by about a dollar a share. In the end, CVCI agreed to pay $7.75 for each share, roughly one-third more than the opening bid from the buyout shop .

And yet, despite the topping bid, Ness is exiting the public market at what would appear to be a rather paltry valuation. The company recently reported that it was tracking to about $600m in sales for 2011, and yet is selling for just $307m. (Including Ness’ small net debt position, the enterprise value of the deal is $342m.) That works out to a scant 0.6 times trailing sales – just one-third the median price-to-sales valuation for US publicly traded companies so far this year, according to our calculations.

Some of that can be attributed to the fact that IT services vendors typically trade at a substantial discount to other technology firms. And yet, even within recent IT services deals, 0.6x trailing sales is the low end of the range for most acquisitions. (For instance, EDS went for that multiple in its sale to Hewlett-Packard in mid-2008, while Perot Systems got more than twice that (1.4x) in its purchase by Dell in September 2009.) In fact, Ness is selling to CVCI for a lower price than it fetched on the open market more than three years ago when the buyout shop first took its stake.

Corel erases iGrafx from its portfolio

Brenon Daly

Contact: Brenon Daly

A decade after picking up iGrafx, the private equity-backed Corel firm has divested the business process management (BPM) software company to newly formed buyout shop The Limerock Group. The move should allow new focus and resources for iGrafx, which was always an odd fit inside Corel. For its part, iGrafx sold almost entirely to enterprises, while Corel is known as a home for many faded, second-rate consumer brands, such as WordPerfect and PaintShop.

Perhaps not surprisingly, the iGrafx business suffered from a bit of neglect inside Corel. At one point, we understand the business was generating about $20m in sales, although it is probably only running at about half that level now. One area that iGrafx will undoubtedly look to expand is around consulting and other services that tend to play a not-insignificant part of BPM deployments. IGrafx may look to build that up through internal development, or the newly capitalized company could tuck-in a small consulting shop.

The move by Limerock, a firm founded by the team that built and eventually sold NetQoS for $200m, comes after a number of big-name buyers have inked BPM deals of their own over the past two years. (Limerock was advised by Northside Advisors, while Pagemill Partners worked the other side.) Significant acquirers that have bought their way into the market since mid-2009 include IBM, Software AG, Progress Software and Open Text. Valuations for these BPM deals has ranged from roughly 1x sales to almost 6x sales. Given iGrafx’s slumping sales and its awkward fit inside Corel, we suspect the business would have likely traded at the low end of that range.

A little something for your trouble

Brenon Daly

Contact: Brenon Daly

Breaking up is hard to do. And it can be expensive, too. But as a pair of deals this week shows, the costs aren’t necessarily borne equally by the two sides in a planned transaction. In the higher-profile case, the market is buzzing that Google may be on the hook for a $2.5bn payment to Motorola Mobility if that deal unravels. If that’s the case, the payment (known as a reverse breakup fee) would be 6-7 times larger than the payment Google would stand to pocket if Motorola Mobility walks away from the transaction.

That gap is much wider than is seen in deals that feature reverse breakup fees, where a would-be buyer might face a fee that would be closer to twice the amount the seller might pay. That’s how it is, for instance, in Permira’s planned $440m buyout of education software maker Renaissance Learning. According to terms of Tuesday’s leveraged buyout (LBO), if Permira walks away from the transaction, it will have to come up with $26m, or nearly 6% of the equity value of the proposed deal. On the other side, if Renaissance Learning backs away, it will have to hand over just $13m, or about 3% of the equity value.

Reverse breakup fees have long been an accepted way for a would-be seller to receive compensation for any risks in getting a transaction closed. (The rationale is that the disruption in business due to an acquisition is much greater to the target company than the acquirer, so the greater potential risk is offset by a greater potential reward.) Of course, these fees are far more common in LBOs than when the deal is struck between two companies, like Google buying Motorola Mobility. But then again, the search giant – going back to its Dutch auction IPO and continuing to today’s practice of not giving quarterly financial guidance – has never been a company that really follows Wall Street convention.

Are Internet infrastructure exits interconnected?

Ben Kolada

Contact: Ben Kolada

Providing further proof that it’s a tough time to be on the market, much less come to market, GI Partners has opted to sell its Telx investment rather than battle through an IPO. The company’s sale to ABRY Partners and Berkshire Partners closes the books (at least for now) on a proposed public offering that Telx initially filed back in March 2010. And we wouldn’t be surprised if Telx’s sale caused other IPO candidates in the industry to rethink their entry onto the public stage as well.

Terms weren’t disclosed, but we understand that Telx caught a fairly high valuation that would have provided a more immediate – and lucrative – return than an IPO. Although the Internet infrastructure industry showed resilience throughout the recession, consistently growing revenue, that hasn’t always been the case when it comes to the public markets. Chinese datacenter operator 21Vianet Group, for example, closed its first trading day on the Nasdaq with a market cap of $1bn. However, since then its shares have lost 40% of their value. (We note, however, that the success of 21Vianet’s IPO was due in part to success from other Chinese IPOs, as well as buyout speculation in the industry.)

Just as the Internet infrastructure market focuses on interconnection, we suspect that its participants’ exits are also interconnected. We feel that Telx’s recent sale to ABRY Partners and Berkshire Partners could cause the industry’s other IPO candidates to pause before hitting the public markets. Our colleagues at Tier1 Research maintain a list of the Internet infrastructure industry’s potential IPO candidates. Although speculation surrounds such fast-growing firms as SoftLayer Technologies, Peak 10, Zimory and Next Generation Data, an IPO for these players may be pushed to the back burner, at least for the foreseeable future.

In Network Solutions’ sale, General Atlantic gets a bit of both exits

Ben Kolada

Contact: Ben Kolada

Web.com is acquiring Web hosting and domain name registration vendor Network Solutions in a deal valued at $756m, including the assumption of debt. And we expect that Network Solutions’ owner couldn’t be more relieved. With flat revenue and customer attrition in recent years, Network Solutions’ private equity owner, General Atlantic (GA), wasn’t likely to find much interest for the portfolio company on Wall Street.

However, GA structured the transaction in such a way that – at least for now – it is enjoying a good day on the stock market. Terms of the deal call for just over a quarter of Network Solutions’ price to be covered by Web.com shares. (That will leave GA and other Network Solutions’ shareholders owning 37% of the combined company.) Web.com initially valued that chunk of equity at about $150m. On Thursday afternoon, the value of the 18 million Web.com shares heading to GA and other owners had soared closer to $200m. The reason? Wall Street liked the acquisition as well as Web.com’s second-quarter financial results. (We’ll have a full report on this transaction in tonight’s Daily 451 and 451 TechDealmaker sendouts.)