Category: Private Equity

Apax goes double or nothing in big software bet

Brenon Daly

Contact: Brenon Daly

Apax Partners is going double or nothing in the latest addition to its software portfolio. The buyout firm plans to spend a total of $2bn to put together a pair of old-line ERP vendors, Epicor Software and Activant Solutions. And it is very much a ‘paired’ deal. In fact, according to terms, Apax closing its Activant purchase is a precondition of its planned take-private of Epicor.

That said, neither Apax’s purchase of Activant from its current private equity (PE) owners nor the buyout of Epicor should present much of a problem to get closed this quarter. But it does underline the necessity of cost ‘synergies’ in a deal (or in this case, two) for a mature company. (We noted that fact in the very similar proposed take-private of Lawson Software.)

If the double-barreled deals go through (as we assume they will), it would mark the end of a two-and-a-half-year effort by Elliott Associates to get Epicor sold. The hedge fund accumulated a 10% stake in Epicor in 2008 and then floated an offer of $9.50 for each remaining share of Epicor. It later trimmed that to $7.50 per share as the software company’s outlook deteriorated. (Epicor’s total revenue dropped 16% in 2009, and sales in 2011, while expected to increase, are still forecasted to come in below the level of 2008.) Apax is set to pay $12.50 per share for Epicor – an offer that Elliot has signed off on.

Lawson: silence, suitors and synergy

Brenon Daly

Contact: Brenon Daly

If Lawson Software had held its scheduled call later this afternoon to discuss its third-quarter earnings report, we suspect that attendance would have been a bit higher than usual. Instead, the old-line ERP vendor scrapped it, citing the two-week-old unsolicited offer from industry consolidator Infor Global Solutions. (Those sorts of things tend to happen to companies that count Carl Icahn as their largest shareholder.) Lawson, advised by Barclays Capital, has said only that it is reviewing the proposal.

While Lawson’s silence is entirely understandable from a company that’s been put in play, it did nothing to dampen investor speculation that another suitor would show up. The stock, which has traded above the $11.25-per-share bid since it was launched, inched a little higher to $12.14 in Thursday afternoon activity. Lawson shares haven’t seen these levels since March 2002.

Perhaps inevitably, Oracle’s name has surfaced as a potential buyer. While Lawson isn’t particularly cheap, it’s also not particularly expensive. Its current market cap of $2bn works out to about 2.6 times projected sales of $770m for the current fiscal year and roughly 15x EBITDA. Another way to look at it: the market values Lawson at about 5x its maintenance revenue. (For comparison, Epicor Software trades at 1.7x sales and roughly 3x maintenance revenue.)

For buyout shops, Lawson’s valuation is already at the upper end of the range that could still deliver a decent financial return, we would think. Of course, Infor is owned by a private equity firm, Golden Gate Capital. But in terms of bidding, Infor is more of a strategic buyer than a financial one when it comes to ‘synergies.’ After all, privately held Infor already has the corporate infrastructure in place to run a $2bn business, roughly three times the size of Lawson.

A post-recession spending record — and then some

Brenon Daly

Contact: Brenon Daly

The first-quarter M&A totals for the tech industry suddenly look a lot different. AT&T’s announced acquisition of T-Mobile USA from parent Deutsche Telekom dramatically inflates the spending, more than doubling the collective value of the 750 transactions announced so far in 2011. The $39bn deal (the largest purchase in the telecom industry in a half-decade) compares to $29bn worth of transactions in the first 11 weeks of the year.

Further, it wasn’t just Ma Bell’s massive consolidation play in the wireless space that pushed up the total on Monday. Liberty Global announced plans to spend a total of $4.5bn on German cable operator Kabel Baden-Württemberg. Additionally, Charles Schwab said it will shell out $1bn in stock for optionsXpress Holdings, its largest deal in a decade. And Broadcom continued its recent steady run of dealmaking, handing over $313m for Provigent. Altogether, that pushed M&A spending so far this quarter to $74bn – the highest quarterly total since Q2 2008. And the post-recession record is only headed higher: the first quarter doesn’t wrap up until a week from Thursday.

Mentor Graphic’s looming showdown

Brenon Daly

Contact: Brenon Daly

Lost in the din surrounding Carl Icahn’s recent effort to take out Lawson Software is the fact that the activist shareholder is already much further along with his stirrings against another target, Mentor Graphics. In less than two months, the electronic design automation company is slated to hold its annual shareholder meeting – a get-together where Icahn hopes to replace several board members as a way to spur a sale of the company. It’s shaping up to be a real showdown.

Last month, Icahn floated an offer of $17 for each of the roughly 112 million shares of Mentor, giving the unsolicited bid an equity value of $1.9bn. (Icahn already owns 15% of Mentor, which is nearly four times more than all the company’s directors and executives hold collectively.) Icahn has been joined in his efforts – in practice, if not officially – by another hedge fund, Casablanca Capital, which has a 5% stake in Mentor.

Mentor has told its shareholders to stick with its current board and strategy. In the proxy filed Tuesday, the company takes a swipe at Icahn’s efforts, saying his selections to the board lack ‘the collective knowledge, skill and experience’ of the current directors. Recall that Mentor’s ‘just say no’ defense successfully stymied an unsolicited bid from rival Cadence Design Systems nearly three years ago. Cadence pulled its offer just two months after launching it, but not before blasting Mentor for refusing to even open its books to a prospective buyer. We doubt that Icahn will go away as quickly and quietly if Mentor continues to stiff-arm him

Lawson ‘Infor-med’ of unsolicited offer

Brenon Daly

Contact: Brenon Daly

In the middle of last year, we penciled out a takeout scenario for Lawson Software that gave the old-line maker of ERP software an equity value of about $1.7bn. Turns out we were off by just $100m. On Friday, the acquisitive, private equity-backed rollup machine Infor Global Solutions floated an unsolicited $1.8bn offer for Lawson. The target said only that it has retained Barclays Capital to advise it on the process.

We thought Lawson might find itself in play because activist shareholder Carl Icahn had taken about 10% of the company’s stock and started talking about ‘maximizing shareholder value.’ (Some of that has already showed up in Lawson’s recent stock chart. When Icahn revealed his stake last summer, shares were changing hands at about $8 each, compared to the $11.25 offer from Infor. We would note that the stock traded through the bid on Monday, hitting a high of $12.87 before settling down at about $12.25 in afternoon activity.)

In many ways, Lawson presents something of an easy target for Icahn and the would-be buyout group. License revenue has slipped in both of the company’s quarters so far this fiscal year. Meanwhile, it has been deemphasizing its consulting services, which is still one-third of total sales. So that business is dropping, too. The only growth has been seen in Lawson’s maintenance revenue. That business runs at an 80% gross margin, one of the main reasons Lawson generates so much cash.

Over the past four quarters, Lawson has thrown off some $116m of EBITDA on $745m of sales, a healthy 16% margin. If we put that trailing performance against Infor’s bid, Lawson is garnering a not-too-shabby multiple: 2.4 times sales and 15x EBITDA. Infor’s bid represents the highest price for Lawson stock in nine years, and would be CEO Charles Philips’ first deal since coming over from Oracle last October.

Big Data means Big Dollars for VCs

Brenon Daly

Contact: Brenon Daly

Just since last summer, the data-warehousing industry has seen a wave of consolidation sweep most of the sizable startups into the portfolios of larger vendors. While dramatically reshaping the industry, the concentrated dealmaking has also generated outsized returns for venture firms that have put money into some of the startups that are tackling the problems of ‘big data.’ By our calculation, the four recent data-warehousing exits – on average – have been 10-baggers for their backers.

The eight-month M&A spree started last July, when EMC reached for Greenplum. Two months later it was IBM’s turn to take out Netezza, the sole data-warehousing startup that had actually made it to the public market in recent years. In mid-February, Hewlett-Packard reversed its long-held strategy to stay with internal data-warehousing development and gobbled up Vertica Systems. And then just last week, the granddaddy of the industry, Teradata, snagged Aster Data Systems.

This run of deals has been a welcome development for venture capitalists, who have been starved recently for moneymaking exits. Consider this: the quartet of data-warehousing startups that have been snapped up have returned some $2.5bn to their investors, an astonishing 10 times the $245m that they collectively raised. (The total funding for the startups comes from The 451 M&A KnowledgeBase, which recently added venture information to many of the deal records.) Taking a dime and turning it into a dollar is a pretty nifty trick – and it’s one that most VCs haven’t been able to pull off across any sector of enterprise IT in a long, long time.

Select recent data-warehousing deals

Date announced Acquirer Target Price VC raised by target
March 3, 2011 Teradata Aster Data Systems $295m $57m
February 14, 2011 HP Vertica Systems $275m* (excluding earnout) $25m
September 20, 2010 IBM Netezza $1.8bn $73m
July 6, 2010 EMC Greenplum $400m* $90m

Source: The 451 M&A KnowledgeBase *451 Group estimate

PE firms back at the table

Brenon Daly

Contact: Brenon Daly

The buyout barons might not be as powerful as they were before the Credit Crisis, but that doesn’t mean the financial buyers can’t elbow aside their rivals from the corporate world. Earlier this week, Golden Gate Capital topped an existing agreement that Conexant Systems had with fellow chipmaker Standard Microsystems. While it wasn’t unusual for private equity (PE) firms to take auctions when credit was flowing cheap and easy, it’s been relatively rare in the past two years.

Terms call for Golden Gate to hand over $2.40 for each share of Conexant, giving the deal an equity value of roughly $180m. (Additionally, the company carries $86m of net debt.) The buyout firm’s all-cash offer topped a cash-and-stock bid of $2.25 per share from Standard Microsystems. The new agreement has a ‘no shop’ clause and is not conditional on financing. It also carries a $7.7m breakup fee, exactly the same amount that Standard Microsystems is pocketing for its trouble.

A 7% bump in acquisition price may not seem like much, but it could be an early signal that PE firms are getting much more aggressive in deals. That’s actually what corporate development executives told us they expected in 2011 from their PE rivals. In our annual survey, nearly four out of 10 (38%) corporate buyers said they expected more competition from buyout shops, compared to just 13% who said the opposite.

RSA = Rumors Swirling Around

Brenon Daly

Contact: Brenon Daly

Candidly, one of the main reasons we’ve always enjoyed the RSA conference is all the gossip at the event. From the show floor to get-togethers that take place along the periphery of the conference, people talk. That’s especially true at the boozy after-hours parties sponsored by vendors and their backers, where the focus is more on martinis than malware.

And once again, last week’s conference didn’t disappoint, with ‘RSA’ once again living up to its abbreviation of ‘rumors swirling around.’ Of course, most of the speculation centered on which security company was going to get taken out next. That’s more than a guessing game if you consider the following conference regulars that have been gobbled up just since last year’s RSA event: McAfee, ArcSight, PGP, SonicWall, Arcot Systems along with dozens of other smaller companies.

As for the next significant player to go, we heard a fair amount of M&A buzz around NetWitness. The company sells a powerful network-analysis platform for traffic capture, classification and analysis, and is thought to be running at roughly $60m in sales. The Washington DC-based startup is run by Amit Yoran, who already sold a company to Symantec back in 2002. (Private equity firm Summit Partners picked up a minority stake in NetWitness about a year ago.) The two names that came up most often as the rumored buyer of NetWitness were Hewlett-Packard, looking to add to its recent ArcSight acquisition, and Cisco, which has already done deals to add security to its core network business.

Telco and colo: a marriage of necessity

Ben Kolada

Contact: Ben Kolada

Telcos and colocation providers are increasingly coming together in a marriage of necessity. Telcos’ own traditional wireline services are in a state of decline from which they will not recover. Meanwhile, colocation providers are growing rapidly, but need a footprint the size of their larger telco peers to continue such expansion. As a result, cross-sector M&A is on the rise, but we wonder if the marriages may someday end in separation.

Case in point: GTS Central Europe. The Warsaw-based communications provider recently began investing in colocation services to offset losses in its own core business. Although 2010 year-end numbers are not yet available, the company’s revenue is expected to take a slight dip, from €384.5m ($551m) recorded in 2009 to about €380m ($500m) for year-end 2010. To offset losses, GTS began looking for growth channels, and subsequently threw its weight behind datacenter services. Last year, the company announced several datacenter completions and expansions, as well as two datacenter-related acquisitions. In June, the company picked up Interware, which operates two facilities in Budapest, and earlier this week it announced that it is acquiring Prague-based single-site colocation provider SITEL Data Center. (We’ll have a full report on the SITEL purchase in tonight’s Daily 451.)

However, following the SITEL buy, GTS is now spinning off its datacenter business into a new entity named CE Colo. Financial terms of the spinoff haven’t been disclosed, but we would expect GTS to maintain some interest in CE Colo, perhaps even a controlling stake. No other telecom operators have yet followed this strategy, and it’s still too early to tell if any ever will – most of the landmark telco-colo transactions we’ve seen so far were announced just last year. But if the revenues in both sectors continue their current trajectories, spinoffs like CE Colo may someday become the norm.

Kaspersky catches some cash

Brenon Daly

Contact: Brenon Daly

Add General Atlantic (GA) to the list of buyout firms that has picked up a stake in an information security vendor. The firm on Thursday acquired a 20% chunk of Russian antivirus software provider Kaspersky Lab for $200m, implying an overall valuation of $1bn. The deal marks the third significant investment by a private equity (PE) shop in a European anti-malware vendor in just the past six months.

GA also appears to have gotten a bargain in becoming the company’s second-largest shareholder. Kasperky’s $1bn valuation works out to about 2 times sales and 8-9x EBITDA, according to our understanding. For comparison, rival anti-malware vendor Sophos got more than 3x trailing sales when it sold a majority stake to Apax Partners last May. (And according to at least two sources, Kaspersky was targeting a valuation of ‘well north’ of $1bn when it was running the process, which took most of 2010.) The third recent antivirus deal was Summit Partners’ $100m investment in AVAST Software last August.