Category: Private Equity

Telefónica nabs cloud hosting firm acens Technologies

Ben Kolada

Contact: Ben Kolada

Consolidation between the telecommunications and hosting industries continued today with Madrid-based telco Telefónica purchasing cloud hosting and colocation provider acens Technologies from buyout shop Nazca Capital. Although this deal seems to be just another in the long line of telco-hosting pairings, it actually represents one of the biggest foreign consolidations that we’ve seen.

Terms of the transaction weren’t disclosed, though public reports claim that Telefónica shelled out approximately €75m ($110m) for the hosting vendor. With some loose math based on applying acens’ historical growth rate to the €30m ($43m) in revenue that Nazca claims acens generated in 2009, we estimate that the company’s 2010 total revenue was likely in the ballpark of €35-40m ($46-53m). If our estimates are correct, that price-to-sales valuation would be slightly less than what Nazca paid for acens in January 2007, though it would still represent a nearly 100% return on capital in just four years. We’ll have more context on this deal, including analysis from our cloud infrastructure and hosting colleagues at Tier1 Research, in a full report in tomorrow’s Daily 451.

Heyday in May for M&A

Brenon Daly

Contact: Brenon Daly

This year opened with M&A spending in both January and February trickling along at the low levels it had been since the final months of 2010 – roughly $12-13bn each month. But then, the trickle turned into a flood. (Or at least the closest we’ve had to an M&A flood since the credit crisis.) March set a post-recession record for the value of announced transactions, with the activity staying steady in both April and now May.

The spending total for the just-completed month of May came in at $25bn. That basically matches the total for April, and is twice the monthly level we had been tallying since September 2010. (The record spending in March of $64bn came largely from AT&T’s proposed $39bn purchase of T-Mobile USA, the biggest telco acquisition in a half-decade.) Although smaller than Ma Bell’s move, big deals also helped boost spending totals in May, with two of the four largest tech acquisitions of 2011 announced in the month.

Altogether, M&A spending through the first five months of 2011 has hit a post-recession record of $137bn, putting the year on track for about $330bn in deal value for all of 2011. If we do hit that level, it will actually exceed the full-year totals for the two previous years combined. Spending on tech deals in recession-wracked 2009 totaled just $147bn, and spending only inched up a bit to $172bn in 2010.

2011 M&A activity, monthly

Period Deal volume Deal value, $bn
Jan. 322 $12bn
Feb. 285 $10bn
March 301 $64bn
April 283 $26bn
May 310 $25bn

Source: The 451 M&A KnowledgeBase

Flips and flops for PE shops

Brenon Daly

Contact: Brenon Daly

There are flips that fly, and flips that flop. Consider the two recent exits by private-equity (PE)-owned companies Skype Technologies and Freescale Semiconductor. One deal basically quadrupled the price of the portfolio company, while the other company is still lingering at a value of less than half its original purchase price. Granted, that ‘headline’ calculation misses some of the nuances of the holdings and their returns to the PE shops, but it’s nonetheless a solid reminder that deals need to be done with a focus on the ‘demand’ side of the exit.

For Skype’s PE ownership of Silver Lake Partners, Index Ventures and Andreessen Horowitz, the $8.5bn all-cash sale to Microsoft came less than two years after the consortium carved the VoIP provider out of eBay for just $2bn. The deal stands as the largest ever purchase by Microsoft, and the double-digit price-to-sales valuation suggests Redmond had to reach deep to take Skype off the board. Skype had filed to go public, but was also rumored to have attracted interest from Google as a possible buyer.

On the other hand, there wasn’t much demand for Freescale, which was coming public after undergoing the largest tech LBO in history. Freescale priced its recent IPO some 20% below the bottom end of its expected range. That had to be a painful concession for the PE owners of the company: Blackstone Group, Carlyle Group, Permira Funds and Texas Pacific Group. The club paid $17.6bn in mid-2006 for the semiconductor maker, loading up the company with billions in debt just as the market tanked. Freescale, which still carts around about $7.5bn in debt, has lower sales now than when it was taken private four years ago.

BeyondTrust buys beyond its core market

Brenon Daly

Contact: Brenon Daly

Announcing its first acquisition since the September 2009 combination that created the current company, BeyondTrust recently picked up the assets of Lumigent. The deal adds Lumigent’s database monitoring to BeyondTrust’s core privileged identity management platform, so the purchase is a fairly logical step into an adjacent market. Terms weren’t disclosed, but we would guess that Lumigent didn’t sell for much more than the $4m of revenue that it generated last year. The company had been struggling in part because of a strategic misstep two years ago to go into the market for application governance, risk and compliance.

BeyondTrust paid for the Lumigent acquisition from its own treasury, even though it does have Insight Venture Partners as a backer. And the company is not done buying. We understand that it is likely to announce another two acquisitions this year. BeyondTrust can afford to do deals because it generates a fair amount of cash, running at a 35% EBITDA margin. The company recorded revenue of some $40m last year, up from $32m in 2009. Assuming those transactions go through, we gather that roughly half of the growth at BeyondTrust for 2011 would come organically, with the remaining half coming through M&A.

Heading in and out at Vector

Brenon Daly

Contact: Brenon Daly

Some eight months after the opening bid for RAE Systems was announced, it looks like Vector Capital continues to have the inside track in taking private the maker of gas detection monitors. The San Francisco-based buyout firm earlier this week raised its offer for RAE Systems to $2 per share, or roughly $120m. That marks the third time that Vector has bumped its bid in its competition with original bidder Battery Ventures.

Vector’s current offer adds some $25m to Battery’s initial price, and is more than twice the level where RAE Systems shares traded over the year leading up to the first announcement last September. Perhaps most crucially, RAE Systems executives, who own roughly 31% of outstanding shares, have thrown their support behind Vector by giving up shares for no consideration as well as rolling over a large portion of their equity holdings.

While Vector works to add RAE Systems to its portfolio, we understand that it may be looking to free up a spot there as well. Several market sources have indicated that Vector has retained Jefferies & Company to advise it on a possible sale of Corel. Running at more than $200m in sales, Corel has a number of products for graphics design, as well as WordPerfect and WinDVD, among other titles.

Vector has owned Corel since 2003, though it did sell a bit of the software company to the public in 2006 before buying back that chunk three years later. Given that Corel is a fairly large portfolio of mostly mature businesses, we suspect that the most likely buyer would be a fellow PE shop. However, the process is still in its early days, according to a source.

Updata secures a bargain from CA

Brenon Daly

Contact: Brenon Daly

When CA Technologies ‘partnered’ with Indian outsourcing firm HCL Technologies to try to offload its security business in November 2007, we termed the move a ‘kind-of, sort-of’ divestiture that was unlikely to fit well with either party. Three and a half years later, the full divestiture is finally done: CA sold it to Updata Partners last week. Although terms weren’t disclosed, we understand that Updata is paying only about $10m for the business, a price that reflects just how much the division had suffered under the joint venture. The roughly $50m in sales at the unit is less than half the level it was at the time of the CA-HCL accord.

The fact that CA got any money for its security assets surprised some. We hear from several participants that at least one bidder put forward a ‘cashless’ offer, offering to take the unit off of CA’s hands for only the assumption of liabilities. (We gather that there was some interest in the business from a few of the larger, privately held security vendors, while from the financial world, both Platinum Equity and Symphony Technology Group were rumored to be bidders.) However, the deal was a very complicated one, not the least of which because there were some questions about the revenue sharing with HCL.

The split ownership, exacerbated by uneven commitments from the two sides, meant that the security business itself was rather starved, particularly for sales and marketing support. (It didn’t help that the division focused on consumers and small businesses, while its corporate parent, CA, targets enterprises. CA will continue to sell enterprise security offerings, which is primarily its identity and access management software.) Out from under the untenable ownership structure, the security unit will likely enjoy renewed focus and resources from its soon-to-be owners at Updata as the buyout firm tries, first, to stabilize the business and then ultimately get it growing again. The deal should close next month.

Tripwire pulls the plug on its IPO

Brenon Daly

Contact: Brenon Daly

Almost exactly a year after Tripwire formally filed its IPO paperwork, the security vendor has opted for the other exit, a trade sale. Thoma Bravo, a buyout shop with a number of other security and management companies in its portfolio, expects to close the acquisition of Portland, Oregon-based Tripwire this month. Terms weren’t disclosed but we understand that Thoma Bravo is paying about $225m. The decision by Tripwire to sell isn’t a surprise, any more than the fact that a buyout shop is its new owner.

If it had gone ahead with its IPO, we suspect that Tripwire would have had a rough go of it as a public company. Wall Street looks for growth, and while Tripwire has put up steady growth, it hasn’t been explosive growth or particularly valuable growth, at least in the eyes of portfolio managers. In 2010, Tripwire bumped up its overall top line 16% to $86m, primarily driven by increases in maintenance revenue and, to a lesser degree, consulting work. Collectively, those lines of business, which now represent more than half of Tripwire’s total revenue, rose 25% in 2010 – three times the rather anemic growth rate of 8% in license sales. (License sales actually flatlined in both the third and fourth quarters of 2010.)

The lagging license sales certainly wouldn’t have helped the company attract interest from strategic buyers. We noted earlier that nearly four years ago Tripwire came very close to selling to BMC. Since it filed its prospectus, we’ve heard that both Quest Software and CA Technologies looked at Tripwire. Still, in our view, Tripwire has a financial profile that should fit well inside a PE portfolio: some 6,000 customers; seven consecutive years of revenue and operating income growth; a rock-steady – and growing – maintenance stream of about $40m; and roughly $10m in cash flow per year.

Microsoft pays a princely premium for Skype

Ben Kolada

Contact: Ben Kolada

In its largest-ever deal, Microsoft announced today that it is buying VoIP provider Skype for $8.5 billion in cash. This is the third time Skype has changed hands since 2005. Microsoft claims that the deal is yet another move in its long line of real-time communications initiatives, but we suspect that the true intent, and more so the price, was driven by a desire to keep the hot property out of the hands of search rival Google, which is expanding its own communications prowess.

That Skype attracted Microsoft should come as no surprise, since the company has consistently garnered more than its fair share of attention in its eight-year history. Since its founding in 2003, Skype has been acquired by eBay, sold to a consortium of private equity investors led by Silver Lake Partners, filed for an IPO, rumored to have been a target by Facebook and Google and is now being scooped up by Microsoft. Its three trade sales combined have totaled more than $13bn in deal flow.

Indeed, Facebook and Google’s rumored involvement in the bidding process would certainly have contributed to the stellar valuation. Consider this: on an equity value basis, Microsoft is paying nearly twice as much as Skype received in its previous two trade sales combined. When factoring in the assumption of cash and debt, the offer values Skype at nearly 11 times its 2010 revenue, and 34x last year’s adjusted EBITDA. And while the price paid represents a fraction of the $50bn in cash and short-term investments Microsoft held at the end of March, it should be high enough to prevent a competing offer from Google alone. A topping bid from Big G would most likely exceed $9bn – or one-quarter of the total cash and short-term investments the search giant held at the end of March.

Skype’s suitors

Date announced Acquirer Deal value
May 10, 2011 Microsoft $8.5bn
September 1, 2009 Silver Lake Partners/Index Ventures/Andreessen Horowitz/Canada Pension Plan (CPP) Investment Board $2.03bn
September 12, 2005 eBay $2.57bn

Source: The 451 M&A KnowledgeBase

Echoes of Oracle in Infor’s reach for Lawson

Brenon Daly

Contact: Brenon Daly

Now that Lawson Software has agreed to a sale to Infor Global Solutions, it’s perhaps worth speculating about just how much Charles Philips learned about the art of M&A during his previous job. Philips, of course, currently serves as CEO of Infor after seven years at Oracle, which has a reputation as a (how to say it?) ‘disciplined buyer.’ The connotations of that description probably depend on which side of the table you sit on. At Oracle, the term is a compliment meaning ‘fiscally responsible’ while the view from the buyside might hold that they are ‘cheap.’

In any case, Philips’ proposed ‘take-under’ of Lawson, which got formalized on Tuesday, carries many of the hallmarks that some folks associate with deals done by his former shop: quick process, relatively low valuation and a confident ‘one-and-done’ offer. Recall that it was just six weeks ago that Infor, which is backed by Golden Gate Capital, lobbed an unsolicited offer of $11.25 per share for Lawson. And even though shares of the old-line ERP vendor traded $1 above the bid in recent weeks, Infor stuck to its original offer.

Provided the deal gets done, the acquisition marks a new era at Infor, with a new chief executive setting its course. Before Philips joined Infor last October, the consolidator had dramatically slowed its dealmaking, announcing just three deals over the previous four years. (And the recent purchases were much smaller ones at that.) Lawson stands as Infor’s largest-ever acquisition, one that will boost the company’s revenue by roughly one-third to some $3bn. Just the sort of move Oracle might have made when Philips was there.

Multiples match on Lawson and Epicor

Brenon Daly

Contact: Brenon Daly

If nothing else, we now know the clearing price for ‘vintage’ ERP companies. (Or more accurately said, we know the proposed clearing price.) That’s at least one conclusion we can draw from the highly unusual situation where there are two deals going on simultaneously for two of the industry’s larger players, Epicor Software and Lawson Software. The two planned acquisitions – representing, collectively, $2.8bn of spending – line up almost exactly in several key metrics.

The numbers: the equity value of Apax’s offer for Epicor is $976m, with an enterprise value (EV) of $1.1bn. On an EV basis, that works out to about 2.5 times trailing sales and roughly 5x maintenance revenue. That mirrors very closely the takeout valuation that Lawson received in an unsolicited bid last month from PE-backed Infor Global Solutions, which it is currently reviewing. Lawson is being valued at 2.4x trailing sales and about 4.5x maintenance revenue. Even on an EV/EBITDA basis, the valuations are not all that dissimilar: Epicor garnering a 20.5x valuation, compared to Lawson’s 15.4x.