Category: Private Equity

Big is back (sort of)

Brenon Daly

Contact: Brenon Daly

The number of big-ticket deals in 2010 jumped by one-quarter from the level posted in each of the past two years, an indication that buyers are once again open to a bit more risk. We tallied 40 transactions valued at $1bn or more last year, up from 32 in 2009 and 33 in 2008. One of the reasons for the rise in 2010 – unlike the two previous years – is that the acquirers had to top a pretty bullish tech market to secure their deals. Companies including Isilon Systems, Netezza, ArcSight and 3PAR all got taken off the board last year at their highest-ever valuation.

Also unlike the two previous years, we had a number of ‘serial shoppers’ on the list. Hewlett-Packard inked three 10-digit deals in 2010, while IBM and Intel each closed two of the big transactions as well. And it wasn’t just strategic buyers. The Carlyle Group announced a pair of billion-dollar acquisitions – on back-to-back days, no less. Overall, buyout shops accounted for seven deals last year valued at more than $1bn, up from four in 2008 and five in 2009.

10-digit transactions

Year Number of deals worth $1bn+
2010 40
2009 32
2008 33
2007 79
2006 74
2005 70

Source: The 451 M&A KnowledgeBase

Digital Realty’s M&A train will slow in 2011

Ben Kolada

Contact: Ben Kolada

Wholesale datacenter provider Digital Realty Trust has been on a buying spree this year, having spent more than 10 times what it shelled out in all of 2009. In total, the company has spent $1.3bn for acquired properties. The majority has come on just two transactions: Sentinel Data Centers and Rockwood Capital’s 365 Main portfolio. Although the deals are starting to pay off, we don’t expect that the firm will write such big checks in 2011.

With the newly acquired properties, Digital Realty’s sales have surged. The company’s revenue is projected to hit $867m this year, which would represent a 70% increase over 2009. Compare that to the more organic growth of 26% in 2009 over 2008. The 365 Main purchase, which closed in mid-July, catapulted third-quarter total revenue 45% over the previous year’s quarter.

However, deals the size of Sentinel Data Centers and 365 Main won’t happen again for some time. San Francisco-based Digital Realty says it will continue to buy properties in 2011, but expects to spend far less than it has this year. The firm says total spending on acquisitions in 2011 will likely be in the range of $200-450m. The midpoint of the range is about one-quarter what Digital Realty has spent so far on deals this year, but still north of the $220m it spent in 2009.

Select Digital Realty Trust acquisitions, 2010

Date announced Target Deal value
June 2 Rockwood Capital (365 Main portfolio) $725m
January 25 Sentinel Data Centers (New England portfolio) $375m

Source: The 451 M&A KnowledgeBase

Tech M&A slumps toward the year-end

Brenon Daly

Contact: Brenon Daly

Tech M&A appears to be heading toward a quiet end to the year, with November marking the third straight month of declining spending on deals. The slump puts the value of deals announced in the just-completed month at about half the level we were recording in the months earlier this summer. Overall, we tallied 252 deals worth $11.2bn. (And as a side note to the total, we would highlight the fact that the spending in November was highly concentrated. A trio of deals – EMC’s purchase of Isilon, the Novell buyout and Oracle’s reach for Art Technology Group – accounted for nearly half the value of all transactions announced last month.)

It’s not just that November slipped when compared to other months this year. The paltry $11.2bn in aggregate M&A value is just one-third the level recorded in November 2009, and is even lower than the total in November 2008, when the economy was in the grips of the worst economic recession in 70 years. In fact, spending for the just-completed November is coming in at about half the average level for the month over the past four years.

As to what this means for tech M&A in 2011, we’re turning to the people who will be striking the deals next year. In the next day or two, we’ll be sending out our annual survey for corporate development executives and tech investment bankers. The surveys cover forecasts for M&A activity, as well as valuations. Anyone interested in filling out the survey (a quick, painless and confidential process), just email me and I’ll send along the appropriate survey. For those who receive the survey in their inboxes soon, we would appreciate 5-10 minutes of your time to get your views on where the M&A market is heading next year.

Not pretty, but it’s done at Novell

Brenon Daly

Contact: Brenon Daly

After holding out for more than eight months, Novell finally accepted on Monday a $2.2bn buyout offer from private equity-backed Attachmate. From the outside, it looks like a case where the buyer – or maybe more accurately, the hedge fund that put the company in play – simply wore down Novell. Under terms, Attachmate will hand over $6.10 in cash per share, or roughly $2.2bn, for Novell.

Yet if we step back and look at the offer, we can’t help but notice that the company is now embracing a bid that only values it slightly more than the original offer that put it in play. For the record, Novell’s board said three weeks after receiving the unsolicited bid from gadfly investor Elliott Associates that the offer of $5.75 for each share ‘undervalues’ the company and its prospects.

Apparently, Elliott’s opening bid wasn’t all that lowball because the company is selling for just 6% more than the offer that ‘undervalued’ it. We would also mention that Novell traded above the $6.10 bid several times over the summer, albeit on pure speculation. (JP Morgan Securities advised Novell, while Credit Suisse Securities and RBC Capital Markets worked for Attachmate.) The deal is expected to close in the first quarter of 2011, pending shareholder approval.

To be fair, the fact that Novell’s board got shareholders even a slight bump above the original offer should be viewed as a sell-side accomplishment. After all, Novell is a hoary, mixed-bag of businesses, with each unit attracting specific suitors. All of that made for an undoubtedly complicated process, with multiple permutations on bidders and bidding teams, as we understand it. (Companies we heard that may have taken a serious look at some point at Novell – or at least some of its businesses – include VMware and Oracle, among others.) Indeed, as part of the transaction, Microsoft will be acquiring a sprawling portfolio of 882 patents from Novell for $450m.

And beyond all of the complications around matchmaking is the fundamental fact that Novell just isn’t that attractive, regardless of whatever business we look at inside the company. Each component of its revenue (license, maintenance/subscription, services) has dropped so far this year, which is part of the reason why Novell has come up short of Wall Street expectations every quarter this year. Overall, sales have dropped 6% in 2010, and current projections call for Novell’s revenue to decline next year, too. So as we look at it, the board probably did a fair job to get Novell valued at $1.2bn (net of cash), which works out to basically 1.5 times sales. Novell shareholders will now have their say on the outcome of the more than eight-month process.

Windstream makes hosting splash among private equity waves

Ben Kolada

Contact: Ben Kolada

Windstream Communications bought into business services once again, this time picking up managed hosting, colocation and cloud computing provider Hosted Solutions. The deal is the first hosting play for Windstream, and shows that private equity buyers aren’t the only ones shopping in the sector.

Windstream is paying $310m in cash for Hosted Solutions, which posted $52m in trailing sales. The deal values Hosted Solutions at 12.7x its trailing EBITDA, and more than double the price that ABRY Partners paid for the company in April 2008. Hosted Solutions employs 125, and Windstream initially plans to retain the majority of those employees, though we expect there will be some corporate turnover as part of the integration.

Although telcos have gone shopping for colocation and hosting companies this year (with the most notable deal being CyrusOne’s sale to Cincinnati Bell), private equity firms have dominated the headlines. We recorded 10 hosting and colocation deals this year with deal values of at least $100m. Of this group, half of the targets went to private equity buyers, and four of those deals involved the target company simply jumping from one PE portfolio to another. Further, buyout shops, including firms both in the US and abroad, accounted for nearly half (46%) of the total spending for these 10 deals.

Top 10 hosting and colocation deals of 2010

Buyer category Number of acquisitions Percent of total spending
Private equity 5 46%
Hosting/colocation 3 32%
Telecommunications 2 22%
Total spending $3.8bn

Source: The 451 M&A KnowledgeBase

Bidding war keeps Phoenix Technologies rising

Brenon Daly

Contact: Brenon Daly

Shareholders in Phoenix Technologies were originally supposed to have their say today on the planned take-private of their company. Instead, they’ll be sitting tight, waiting to see if the maker of core systems software can fetch yet another round of topping bids. The vote is currently scheduled in two weeks, and we wouldn’t at all be surprised if the price put to shareholders then is higher than the one on the table now.

Original bidder Marlin Equity Partners is currently offering $4.20 for each share of Phoenix Technologies, valuing the company altogether at $152m. That’s roughly 9% higher than the $139m that Marlin initially offered in mid-August before getting jumped by The Gores Group. (RBC Capital Markets is advising Phoenix Technologies in the process.) To our mind, there’s more than a little irony in a bidding war around Phoenix Technologies, a company that has been unknown and unloved for much of its two decades on the Nasdaq.

In any case, the tug-of-war over Phoenix Technologies is a far cry from the wildly lucrative bidding war around 3PAR earlier this summer. A comparable escalation would push the offer for Phoenix Technologies a bit above $7 per share, or more than $250m. That’s not likely to happen. But we could certainly imagine a few more dollars tacked on to the final price. Investors expect that as well. Shares of Phoenix Technologies have traded above the official bid all week.

Rich tech companies put away their checkbooks

Brenon Daly

Contact: Brenon Daly

Where are the corporate buyers? That’s what we were wondering when tech M&A activity in October came in well below both the year-ago period and the monthly average so far this year. Consider this: October stands as the first month in 2010 that so-called strategic buyers didn’t announce a single transaction valued at $1bn or more.

Instead, the shopping in October was led by private equity (PE) shops, notably The Carlyle Group. The buyout firm announced the two biggest tech deals of the month, with back-to-back acquisitions of CommScope and Syniverse Technologies. Carlyle values those two purchases at $6.5bn – representing half the value of all tech M&A spending in October. (See our full report on October’s M&A totals.)

Carlyle’s big pair of deals in October follows a more representative September, when IBM and Hewlett-Packard held the top two spots for large deals. (IBM paid $1.8bn for Netezza on September 20, a week after HP said it will pay $1.65bn for ArcSight.) More broadly, tech companies have posted a number of 10-digit transactions since the summer, with Intel notching two of them, plus the typically acquisition-averse SAP doing the largest deal in its history in May.

It’s hard to figure out exactly what’s keeping companies out of the market these days. Third-quarter financial results, many of which were announced in October, have been solid for the most part. Similarly, guidance for the fourth quarter and into 2011 has been relatively upbeat. Reflecting that, the Nasdaq tacked on nearly 6% in October, helping the tech-heavy index approach the highs that it hit both back in April and in mid-2008. Further, the cash just keeps gushing into the treasuries at many tech companies.

Frightfully light M&A totals in October

Brenon Daly

Contact: Brenon Daly

The economic recession may be (officially) over, but the recession in tech M&A lingers on. If anything, it’s getting deeper, with the fourth quarter starting at a particularly sluggish pace. In the just-completed month of October, we tallied only 243 deals worth a collective $11.7bn. Not only is that substantially below the same month last year, but it also significantly lags the average monthly M&A activity that we’ve recorded so far this year. The reason? Corporate buyers largely sat out the month.

Year over year, the number of deals in October 2010 declined 15%, while spending dropped 22%. Similarly, when compared to earlier months in 2010, October is going down as one of the weakest months for acquisitions. Through the first three quarters of the year, the average number of monthly transactions stood at 268, or about 9% higher than the 243 deals in October. (Indeed, only one month in 2010, August, has recorded fewer deals than October.) The drop-off in M&A spending in October is even more pronounced. The total value of transactions hit just $11.7bn, which is 25% lower than the average monthly spending of $15.7bn in the nine months leading up to October.

Obviously, we don’t want to read too much significance into a single month worth of numbers, particularly in a business as inherently lumpy as M&A. Nonetheless, we might suggest that M&A has joined a number of other markets that have largely been bypassed by the recovery. Clearly, the impact of tech acquisitions not getting done is nowhere near as significant, for instance, as the dreadful employment picture (one out of 10 Americans out of work) or the seemingly intractable housing mess (banks will likely foreclose on more than one million homes this year). But the continuing tech M&A slump is still worth noting as yet another sign of how far we are from where we once were

Ulticom’s shareholders cash out

Brenon Daly

Contact: Brenon Daly

Cash is king. We got a reminder of that tried-and-true business adage when we were skimming the terms of Ulticom’s sale to buyout shop Platinum Equity earlier this week. While the pending take-private is hardly a regal outcome for shareholders of the telecom software provider, the structure of the deal helps them get a bit more back from the business than they would have otherwise.

According to terms of Tuesday’s buyout, Platinum will pay $2.33 for each of the roughly 11 million shares outstanding at Ulticom. That works out to about $26m of equity consideration for the company. Far more important, however, the buyout shop will hand back roughly $64m of Ulticom’s $77m in cash to shareholders. This is actually a rare case of a cash ‘rebate’ being pocketed by the existing owners of a business (shareholders) rather than the soon-to-be owners. The bid works out to an enterprise value for Ulticom of about $16m, for a business that was likely to do around $38m in revenue in the current fiscal year.

Further, this is actually the second time that Ulticom has parceled out its cash. A bit of background: Ulticom is majority owned by Comverse Technology. The scandal-tainted company acquired Ulticom in 1996, which then spun off a chunk in a public offering in April 2000. That offering – along with a secondary shortly afterward – gave Ulticom way more money than it could ever use. While the company was sitting on a mountain of cash, interest in it was muted because Ulticom had to restate several years worth of financial filings because of options grants and revenue recognition issues. Those concerns pretty much sank Ulticom’s M&A plans in 2008, when it was being advised by Jefferies & Company.

Last year, however, Ulticom got itself back together. It settled with the SEC, got relisted on the Nasdaq and even threw a bone to long-suffering shareholders, paying out $200m in cash through a dividend. (Part of the reason Ulticom emptied out its treasury, we suspect, is to make it more attractive to private equity firms, which wouldn’t have to write such a large check for the company.) The move paid off for Ulticom, not to mention its shareholders. Morgan Keegan Technology Group (the former Revolution Partners) advised Ulticom on the deal, which is expected to close by January

Is GeoLearning the next to go?

Brenon Daly

Contact: Brenon Daly

While the employment market may still be sluggish, the market for software that helps companies with their employees is bustling. We recently noted that both the number of deals and spending in the human capital management (HCM) market so far this year is rivaling the records set when the overall M&A market was much healthier. Add to that, there’s even an HCM vendor that’s eyeing the other exit: Cornerstone OnDemand filed to go public two weeks ago, one of the few tech companies that’s willing to brave the chilly IPO market.

As to what’s the next likely deal in the HCM market, recent indications have pointed toward a sale of GeoLearning. (We understand that the Des Moines, Iowa-based company has retained Raymond James & Associates to advise it on a process.) Founded in 1997 by current CEO Frank Russell, GeoLearning sells its learning management software (LMS) through both a hosted and on-demand model to more than 700 customers. In February 2008, GeoLearning took in its first and only institutional money – a $31m investment from Volition Capital, which was known as Fidelity Ventures at the time.

A little more than a month ago, fellow LMS startup Learn.com got snapped up by Taleo for $125m. Sources have indicated that ADP may have been the initial bidder for Learn.com, looking to add to the half-dozen HCM acquisitions the services giant has already done. We would expect ADP to at least look closely at GeoLearning. But from our perspective, the more likely acquirer for GeoLearning is SuccessFactors. The two companies have had an integrated offering on the market for more than four years, and continue as close partners. We gather that GeoLearning is slightly larger than Learn.com, which was running at about $30m in sales.