Category: Private Equity

Sophos is a seller

Brenon Daly

Contact: Brenon Daly

Former IPO hopeful Sophos will stay private (at least for the time being), but will have a new owner, the anti-malware company said. The new majority holder is Apax Partners, having picked up a 70% stake from both TA Associates, which had been a minority shareholder since 2002, and Sophos’ two founders. The purchase put an overall price tag of $830m on Sophos.

The sale comes after much speculation that Sophos, which had filed to go public in November 2007, was once again looking for an IPO. In fall 2009, British media reports indicated Sophos was planning an offering in 2010 that would have valued the company at about $1bn. Instead, Sophos is taking what we would consider a multiple at the low end of the range, even though the company’s size and recent growth rate might imply an above-market valuation.

Sophos indicated it recorded billings of $330m and revenue of $260m for its fiscal year, which ended March 31. On a trailing basis, that works out to just 2.5 times bookings and 3.2 times sales. Assuming Sophos continued growing at a 19% rate for the current fiscal year, it would have finished this year with about $310m in sales. That means Apax is valuing Sophos at just 2.7 times projected revenue.

Other security companies that have danced on and around the public stage have recently fetched much richer valuations, at least in one key measure. Encryption vendor PGP garnered four times trailing revenue in last week’s sale to Symantec. While PGP may or may not have been planning to go public, the most recent security IPO does trade at a notable premium to the valuation Sophos just got in its sale. Unified threat management vendor Fortinet currently commands a $1.25bn market capitalization, which works out to 4.9 times trailing sales.

Double-door exits

Brenon Daly

Contact: Brenon Daly

When companies look for an exit, there is usually door number one (IPO) or door number two (trade sale). But in some rare cases, it’s not either/or, it’s both. That’s playing out in two very different ways around Symantec’s acquisition of encryption vendor PGP. The purchase by Big Yellow was the first of a doubleheader day in which it also picked up its OEM partner, GuardianEdge Technologies. (Incidentally, the PGP buy was Symantec’s largest acquisition since reaching across the Atlantic for on-demand vendor MessageLabs in October 2008.)

But back to exits. With the sale of PGP, we expect the next big liquidity event for an encryption vendor to be the IPO of SafeNet. We’ve heard recent talk of an offering for the company, which was taken private by Vector Capital in early 2007. Since its buyout, SafeNet has done a few deals of its own, including the contentious acquisition of Aladdin Knowledge Systems in August 2008. We understand that SafeNet is running at north of $400m in revenue.

The sale of PGP also means that investment firm DE Shaw has now recorded one of each potential exit over the past month. In late March, portfolio company Meru Networks went public, and now fetches a market valuation of about $250m. (The offering by Meru came after many other wireless LAN providers got snapped up.) DE Shaw also owned a chunk of PGP, meaning it will also get a payday from Symantec’s $300m purchase of the encryption vendor.

PE: which door is marked ‘exit’?

Brenon Daly

by Brenon Daly, Jason Schafer

After chalking up some 17 purchases under the ownership of a private equity (PE) consortium, ViaWest has been bought by another PE firm. Oak Hill Capital Partners will pick up the 11-year-old managed hosting provider, which currently operates 16 datacenters and counts 1,000 customers. Although financial details of the transaction were not disclosed, we estimate the purchase price at around $420m. That works out to about 4.2 times trailing revenue and about 10 times cash flow for ViaWest, according to our understanding. (My colleagues at Tier1 Research estimate that roughly 70% of ViaWest’s revenue comes from its colocation business, with the remaining 30% coming from managed services.)

The deal, which should be completed this quarter, caught our eye because it is yet another recent sponsor-to-sponsor transaction that we estimate is valued in the hundreds of millions of dollars. Almost exactly two months ago, Francisco Partners flipped RedPrairie to New Mountain Capital for what we understand was roughly the same price as ViaWest. The sale of the supply chain management vendor came even though it had filed a few months before that to go public.

While there’s certainly nothing wrong with buyout shops swapping assets, it’s hardly the sign of a healthy exit environment for PE firms. Of course, there is one gigantic counterpoint to that: NXP Semiconductors, owned by Bain Capital and KKR, filed last week to sell $1.15bn worth of shares on the NYSE. The buyout tandem picked up the chip maker in 2006, when it was spun off of Royal Philips Electronics. We’re certain that a lot of fellow financial buyers, which also took home chip companies during the LBO boom in 2006-07, will be following NXP’s offering very closely.

Nokia browses for an advantage

Contact: Jarrett Streebin

In an effort to increase its appeal in emerging markets, Nokia has bought Novarra, the first of two deals in as many weeks. With the acquisition, Nokia obtains Novarra’s faster and more-efficient browser, which is important in emerging markets where bandwidth limitations exist. Nokia is also playing catch-up with players like Apple and Research In Motion that already have their own browsers.

Nokia ships more than 400 million phones annually, many to customers in emerging markets such as Africa, Asia and South America. Having a fast, low-bandwidth browser like Novarra will enable Nokia to better attract carriers in these regions and with the smartphone craze just starting to take off, the company gains an edge on competitors whose browsers require more bandwidth.

Although the deal value wasn’t released, we understand that Nokia paid roughly four times trailing sales for Novarra. The 10-year-old startup had received $88 million in funding from JK&B Capital, Qualcomm, Fort Washington Capital Partners, Kettle Partners and Colorado Investment Securities, with $50m of this coming in a round in 2007.

This move will also affect Novarra’s rivals such as Opera Software and Mozilla. The impact on Mozilla will be limited because its browser targets 3G smartphones like Nokia’s N900 to provide a rich, unconstrained mobile browsing experience. Opera is currently the market leader in mobile browsing, with more than 50 million active users, many of whom are using Nokia phones. Now, Nokia will have its own browser to compete. Although this will cut Opera’s market share, Vodafone has already announced that it will be preloading Opera on many of its phones in emerging markets. It could be that Vodafone needs a browser of its own, too.

A Double-Take takeout?

Brenon Daly

Contact: Brenon Daly

Never mind the business, somebody has their eye on Double-Take Software. The file-replication software vendor said Monday that it came up short in its first-quarter performance, continuing the struggles that it saw throughout 2009. Last year, maintenance revenue flat-lined, while license sales dropped by one-quarter. And although the first quarter is starting off a bit underwhelming, Double-Take is still projecting that it will grow this year. However, even if the company hits the high end of its estimate of $95m, sales for 2010 will still fall just short of 2008’s level of $96m.

Apparently, that lackluster performance hasn’t dimmed the company’s appeal. As Double-Take was announcing its Q1 miss, it also said – in an ‘Oh, by the way…’ manner – that it had received an ‘unsolicited, non-binding’ expression of interest from an unnamed suitor. No terms were revealed so it’s hard to know, specifically, what’s on offer to Double-Take shareholders. The company says only that the bid is ‘above recent trading prices.’ Does ‘recent’ mean a bit under $9, where shares have been since early February? Or does ‘recent’ also include the period in January when shares changed hands above $10, before the company warned (for the first time) that the quarter was coming in a bit light? On the report, Double-Take stock jumped 15% to $10.05 in Monday afternoon trading.

As to who might have floated the bid, it strikes us that this looks like a private equity (PE) play. If a strategic buyer wanted Double-Take, we don’t see it approaching the company in such a fast-and-loose way. Besides, there are basically only two companies that would make obvious bidders: Dell and Hewlett-Packard. The two tech giants are Double-Take’s main channel partners, with Dell accounting for a full 17% of the company’s revenue on its own. Also, both vendors could presumably benefit from Double-Take’s large customer base of SMBs, which numbers more than 22,000. Of course, an auction could draw out any interested strategic player, so the potential bidders aren’t necessarily limited to HP and Dell.

But as we say, we think this offer came from a buyout shop. And we can certainly understand Double-Take’s attractiveness to a financial buyer. In short, it’s cheap. Even with the stock’s pop on Monday, the company still only garners a market cap of about $220m. And the net cost is even cheaper, because the debt-free, profitable vendor carries almost $100m in cash on its balance sheet. At an enterprise value of just $120m, Double-Take is valued at less than three times its maintenance stream. That’s a valuation that any number of PE firms probably figure they could make money on.

An exclusive ‘club’

Brenon Daly

Contact: Brenon Daly

The price of admission for a ‘club deal’ just got a bit more expensive. The trio of private equity (PE) firms bidding for Irish e-learning firm SkillSoft recently bumped their offer to $1.2bn, up from the original $1.1bn bid in mid-February. The buyout firms teaming up to take SkillSoft private are Berkshire Partners, Bain Capital and Advent International. According to terms, the trio will be using equity to cover slightly more than half of the purchase price ($680m, or 57% of the $1.2bn transaction).

The planned leveraged buyout (LBO) of SkillSoft is one of only three take-privates by a PE club since January 1, 2008 valued at more than $1bn. (That doesn’t include syndicate purchases of divestitures or other parts of companies, such as the carve-out of Skype from eBay by a quartet of firms.) When credit was flowing freely in 2006-07, multibillion-dollar LBOs were plentiful, which was a primary reason that overall spending on tech M&A in each of those years topped $400bn. In both 2006 and 2007, PE shops accounted for more than 20% of all money spent on tech deals.

The topping bid for SkillSoft comes at a time when overall PE spending is dropping to some of the lowest levels since it began to recover last year. After averaging about $9bn in both of the quarters since the US recession officially ended, the value of deals by PE firms fell to just $6bn in the recently completed first quarter. Incidentally, the decline of PE deal value matched almost exactly the drop-off in overall first-quarter tech M&A spending, which came in at the low end of the range that we’ve tallied in recent quarters. Click here to see our full report on first-quarter M&A.

PE activity

Period Deal volume Deal value
Q1 2010 63 $6bn
Q4 2009 92 $9.9bn
Q3 2009 83 $8bn
Q2 2009 76 $2.8bn
Q1 2009 46 $250m

Source: The 451 M&A KnowledgeBase

Consistently inconsistent M&A in Q1

Brenon Daly

Contact: Brenon Daly

The first quarter is in the books and it’s hard to read much from it, at least in terms of M&A. While the quarter saw more deals announced than any other quarter since the credit crisis erupted, the aggregate spending on those transactions is lingering about one-third below the recent average. In the just-completed quarter, we recorded 841 acquisitions, with a total bill of $31bn. (We should note that nearly one-third of the M&A spending in the quarter came on a single telecom deal, where an Asian operator spent $9bn on mobile businesses in Africa just two days before the end of the quarter.)

Overall, the numbers point to an inconsistent recovery in the M&A market. On the one hand, many of the big buyers were busier than ever. CA Inc, Google, IBM and Oracle (among others) all announced at least three transactions in the just-completed quarter. But on the other side, we also saw a number of deals that continued the worrisome trends that we thought we might have left behind in 2009, with additional scrap sales and low-multiple divestitures in the first few months of 2010. Look for our full report on first-quarter M&A in tonight’s MIS and TDM sendouts.

Recent quarterly M&A activity

Period Deal volume Deal value
Q1 2010 841 $31bn
Q4 2009 822 $55bn
Q3 2009 758 $38bn
Q2 2009 778 $49bn
Q1 2009 663 $10bn

Source: The 451 M&A KnowledgeBase

‘Pay us to shut up’

Brenon Daly

Contact: Brenon Daly

Add another deal to the hit list for plaintiffs lawyers. The ink was barely dry on Thoma Bravo’s $143m all-cash offer for PLATO Learning late last week before the ambulance-chasing law firms launched their ‘investigations’ into whether the online education company did right by its shareholders. Equally wrongheaded lawsuits (at least in our view) have been filed against Chordiant Software and Techwell in recent days.

Never mind that the bid of $5.60 for each share of PLATO represents the highest price for the stock since November 2006. And never mind that with the premium, shareholders in PLATO have seen the value of their holdings more than triple over the past year. (That’s five times the return booked by those of us who had our money in the S&P 500 over the past year.)

According to PLATO, it wasn’t looking to sell itself when the buyout shop approached it a few months ago. (Terms do include a no-shop provision, but there is a ‘fiduciary out’ that would allow the company to talk with other suitors, if any surface. There is a $5.8m breakup fee, representing a slightly higher-than-average 4% of deal value.) Of course, none of the terms really matter in the strike suits. The law firms are just looking to make noise, hoping the companies will pay them to shut up.

More on Intersil-Techwell

Brenon Daly

Contact: Brenon Daly

We looked at Intersil’s purchase of Techwell on Thursday, primarily from the perspective of the senseless lawsuits that are swirling around the transaction. But fittingly for the largest acquisition of a US-based chip company since mid-2007, there’s a lot more that’s noteworthy about the deal. (Note: The equity value of the transaction is actually $450m, while the $370m figure in the announcement is the enterprise value.)

For starters, Intersil’s pickup of Techwell, which is expected to close in two months or so, is the sixth deal the chip company has inked in the past year and a half. (In another report, we noted some similarities in a pair of purchases that Intersil did back in 2008.) At $450m, the buy is the largest that Intersil has announced in a half-decade. The acquisition gets Intersil into two new markets: video security surveillance systems, where Techwell gets about 70% of its sales, and automotive displays, which accounts for the remaining 30%.

Also, the planned sale of Techwell represents the second exit at an above-market multiple in just three weeks for Technology Crossover Ventures (TCV). A late-stage investment firm, TCV owned chunks of both Techwell and RiskMetrics Group, which sold to MSCI Barra for $1.55bn at the beginning of March. TCV holds nearly 4.3 million shares of Techwell, according to the latest 13F filing with the SEC, meaning the firm stands to enjoy a $79m payday when the deal closes.

A nope from Novell

Brenon Daly

Contact: Brenon Daly

The only surprise about Novell turning down the unsolicited $2bn offer from Elliott Associates was the timing. In an unorthodox move, the software vendor said ‘thanks, but no thanks’ to the hedge fund on Saturday morning, when most thoughts were turning to a full day of March Madness. (And what a maddening day it turned out to be, at least for people who filled out their brackets with top seeds: On Saturday, teams seeded No. 1, No. 2 and No. 3 all got sent packing.)

In dismissing the bid, Novell’s board of directors said the offer from Elliott of $5.75 for each share ‘undervalues’ the company and its growth prospects. As an aside, we’re not exactly sure what growth Novell is referring to. The vendor has come up short of Wall Street revenue estimates for both quarters of its current fiscal year so far, and sales this fiscal year, which ends in October, will almost certainly come in below the $862m it recorded last fiscal year. Revenue in the following fiscal year is also likely to come in below last fiscal year, at least according to Wall Street projections.

Even without much top-line excitement, Novell does nonetheless have some valuable assets: A bankable $600m maintenance revenue stream, a decent Linux business and probably the fourth-largest portfolio of identity and access management technology. Of course, its most attractive property is its treasury, which is stuffed with a cool $1bn in cash and short-term investments.

And finally, we would note that Novell does have an experienced adviser in JP Morgan Securities as it explores options to enhance shareholder value. In just the past 10 months, JP Morgan has worked with two other long-in-the-tooth software companies that have been targeted in publicly contested M&A processes. Both Borland Software and MSC Software ended up getting sold, with Borland going for a whopping 50% higher than the initial bid.