On the same day it closed the divestiture of its authentication business, Secure Computing said it will pay $15m for Securify. The deal, which is expected to close in the fourth quarter, also has a potential $5m earnout. Secure said it plans to add Securify’s identity-based monitoring and control technology to its firewall. The majority of Securify’s customers are government, and Secure Computing plans to cross-sell into that market. Founded in 1998, Securify had raised more than $70m in VC. However, it only generated about $13m in revenue last year. Secure Computing indicated the acquisition would boost earnings next fiscal year.
Category: technology stocks
Open Text crashes LBO party (again)
For the second time in as many years, Open Text has topped a buyout shop to take home a struggling enterprise content management (ECM) vendor. In mid-2006, Open Text crashed a planned take-private of rival Hummingbird by Symphony Technology Group, along with financial backer Tennenbaum Capital Partners. To land Hummingbird, Open Text ended up paying about $18m more than the buyout firm had offered.
Open Text won’t have to reach nearly as far into its pockets this time around. On Thursday, the company bid $4.80 per share of Captaris, valuing the document capture technology vendor at $131m. That’s only a $1.4m – or less than 1% of deal value – bump over an existing offer from buyout firm Vector Capital. Vector made the offer of $4.75 per share of Captaris in March, six months after it began pushing the company to sell.
By the time Vector met with Captaris, it had snapped up about 2.7 million shares, or about 10% of the company. However, according to an SEC filing on its purchases, Vector paid around $5 per share. It’s hard to see how the buyout firm is going to be too far above water on its Captaris holdings, given the $4.80 per share offer from Open Text. As a final note, we close with the fact that if Vector had just bought a slug of Open Text stock when it started buying Captaris shares, it would be up nearly 40% on that holding. We know Vector isn’t a money management firm, but in this case, it would have been better to buy the buyer, rather than the seller.
Buying and building at Google
Since the beginning of 2007, Google has spent nearly $3.5bn on research and development. The freewheeling company, which makes liberal use of the ‘beta’ tag for many of the in-house projects it rolls out, often goes to great pains to present a corporate portrait of uninhibited engineers running wild on their whiteboards, coming up with the next Great Idea. (All the while, founders Sergey and Larry benevolently look on.)
With all the building going on at Google, it’s easy to lose sight of the fact that the company is also buying. In fact, since the beginning of 2007, Google has averaged about a deal a month. That’s about the same acquisition pace as both Cisco and Oracle over the last 18 months, although the sizes of the deals – and the rationale – are very different. Google, for instance, has never purchased a public company.
Instead of the consolidation plays inked by other large vendors, Google tends to pick up small bits of technology or even a team of engineers that the company can eventually turn into a product. Sometimes, the acquisitions show up directly in Google products, such as its mid-2005 purchase of Android Inc. At the time, Android was reportedly working on an operating system for mobile phones, which Google officially unveiled last November. Another example is Google’s purchase in November 2006 of iRows, which became the spreadsheet offering in Google Docs.
Other Google purchases show up only as features in more significant offerings. In May 2007, for instance, Google picked up GreenBorder Technologies, a small company with a fitful history and a doubtful commercial outlook, but some solid technology. Specifically, GreenBorder developed a virtualized browser session, which isolated any browser-based security threats from the user’s computer.
However, not much had been seen from this ‘sandbox’ technology over the past year. At least, not until Google rolled out its new Chrome browser on September 1. One of the key selling points of the would-be killer of Internet Explorer: security. According to Google, Chrome prevents malware from installing itself on a computer through a browser as well as by blocking one tab from infecting another tab. In our opinion, it won’t take many people switching to Chrome to justify the $20m-30m we estimate Google spent on GreenBorder for that acquisition to pay off.
Google deal flow
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Source: The 451 M&A KnowledgeBase
Chipping away
It’s one down and (at least) one to go for AMD. The battered chip maker moved earlier this week to dump its digital TV (DTV) chip business to longtime partner Broadcom. AMD will pocket $193m in cash from the divestiture. Although the unit had been on the block for some time, AMD got a decent price for the cast-off. We understand the DTV unit was generating in the neighborhood of $150m in sales, meaning AMD got more than the typical ‘1x and done’ divestiture multiple. Further, we would note that the valuation of the DTV business at 1.3x sales is about twice AMD’s own price-to-sales valuation.
With one of the legacy ATI Technologies businesses off the books, AMD can move on to unwinding yet another part of that disastrous acquisition. (Since AMD spent $5.4bn in cash and stock on graphics chip company ATI two years ago, shares of the second-largest chipmaker for computers have plummeted 70%.) The next unit on the auction block: Processors for multimedia applications that run on mobile phones. Rival Intel made a similar move two years ago, selling its communications processor unit to Marvell Technology for $600m, which valued the unit at an estimated 1.5x sales. We suspect AMD would be perfectly happy with that kind of valuation in any divestiture of its mobile business. As to who might be on the other side of the deal, two companies come immediately to mind: Qualcomm is always on the lookout for more IP, and communications chipmaker Atheros has done three acquisitions in the past two years and is said to be looking for more.
Hiring bankers
Once thought to be just part of the broader ERP offering, the so-called human capital management (HCM) market has come into its own in recent years. That has meant a few IPOs (going back to when there was a market for the offerings) as well as two or three HCM deals each year worth more than $100m. Recently, those twin threads came together in HireRight. The $195m acquisition of that company, which sells pre-employment screening software, closed earlier this month, almost exactly a year after the company went public.
In addition to the acquisition of HireRight by a private company serving the US government, we also noted one of the largest deals for market consolidation earlier this summer when Taleo spent $129m for longtime recruiting software rival Vurv Technology. (As opposed to consolidation, earlier HCM deals were typically done as a way for the acquirer to get into new markets or expand its product portfolio, such as outsourcing giant ADP spending an estimated $160m two years ago for Employease, an on-demand HCM vendor focused on the midmarket.)
So what does HCM deal flow look like for the rest of the year? Salary.com, which picked up a small British firm on Tuesday, has indicated that it plans to ink another deal or two before the year is out. Salary.com went public last year and has done two deals since then, including this week’s $5m purchase of InfoBasis.
More intriguing, however, is the rumor we heard from two market sources that PreVisor, a PE-backed HCM vendor selling employee screening and testing software, is looking to sell. The company was formed in August 2005 through the combination of three companies, and it has done a handful of acquisitions since then. There is no initial word on who might be bidding on PreVisor, which is owned by Veronis Suhler Stevenson.
HCM deal flow
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Source: The 451 M&A KnowledgeBase
Corporate castoffs
Look who’s hitting the corporate garage sales these days – other corporations. While divestitures used to go most often straight to private equity shops, more than a few castoff businesses are now finding homes inside new companies. The latest example: AMD’s sale of its digital TV chip division Monday to Broadcom for $193m.
Given AMD’s struggles, as well as the fact that rival Intel has shed a number of businesses in recent years, the divestiture wasn’t a surprise. In fact, my colleague Greg Quick noted two weeks ago that AMD was likely to dump its TV chip business, naming Broadcom as one of the likely acquirers.
On the buy side, Broadcom joins fellow publicly traded companies Overland Storage, L-1 Identity Solutions and Software AG, among others, that picked up properties from other listed companies this year. That’s not to say that buyout firms have been knocked out of the market, despite the tight credit conditions. PE shops Vector Capital, Thoma Cressey Bravo and Battery Ventures have all taken businesses off the books of publicly traded companies in 2008.
Still, the activity by the corporate shoppers is noteworthy. And the list is likely to grow as more companies look to clean up their operations during the lingering bear market. The next name we may well add to the list is Rackable Systems, which said earlier this month that it is looking to shed its RapidScale business. (The divestiture would effectively unwind its acquisition two years ago of Terrascale Technologies, and comes after a gadfly investor buzzed Rackable for much of the year.)
As to who might be eyeing the assets, we doubt there are many hardware vendors interested in RapidScale, because they have either made acquisitions (Sun’s purchase of Cluster File Systems, for instance) or have partnerships (both EMC and Dell partner with Ibrix). However, a service provider could use the technology to enhance its storage-as-a-service offering. In a similar move, we’ve seen telecom giants like BT and Verizon pick up security vendors to offer that as a service. And finally, we’d throw out a dark horse: Amazon, which is one of Rackable’s largest customers, could use RapidScale’s clustered storage technology to bolster its S3 offering.
Big, happy family or favorite child?
For an executive who learned the ropes from Larry Ellison, Marc Benioff has adopted a very ‘un-Oracle-like’ approach to M&A. Since the company he founded, Salesforce.com, went public in mid-2004, Benioff has inked just five deals. The total shopping bill: less than $100m. Oracle, on the other hand, hardly touches a deal worth less than $100m. In the same four-year period that Salesforce.com has been public, Oracle has closed 45 deals with an announced value of more than $30bn.
Of course, the two companies are in very different stages of their lives, which goes a long way toward shaping their M&A activity. While Ellison and Oracle look to consolidate huge blocks of the software landscape, Benioff and Salesforce.com target tiny technology purchases that allow them to extend their on-demand offering to new markets. We saw that with Salesforce.com’s purchase last year of content management startup Koral, which had just nine employees. And on Wednesday, Salesforce.com announced its largest deal so far, spending $31m on call center software vendor InStranet.
But we would add another – perhaps less obvious – reason for the rather shallow deal flow at Salesforce.com. In many ways, the company is caught between shopping and partnering. In an effort to get a richer valuation, Salesforce.com has pushed Force.com and AppExchange as a way to be viewed as a platform company, rather than merely an applications vendor. (That effort got a big boost this week from Dell, which said it will be developing applications on the Force.com platform over the next three years.)
However, the very success of these efforts helps to explain why Salesforce.com has to keep its checkbook in its pocket when shopping. It can either focus on building out its platform or it can focus on deal-making – it can’t do both. By design, platforms are broad, open and inclusive, while M&A necessarily involves selecting one above all others. Benioff can’t pick a favorite child and expect to have a big, happy family.
To illustrate the dilemma, consider the situation concerning sales compensation, a line of business that’s a logical extension of Salesforce.com’s core CRM product and one the company could easily buy its way into. Indeed, there are already more than a half-dozen companies offering their sales compensation products on AppExchange. But imagine if Salesforce.com decided to buy one of the vendors, say Xactly Corp. Obviously, that purchase would alienate AppExchange rivals like Centive and Callidus Software, which would probably pull their offerings from AppExchange the day the deal was announced. Salesforce.com may well make up that immediate loss of revenue down the line. But as indicated by Wall Street’s brutal reaction Thursday to the company’s second-quarter report, it’s best not to tamper with the top line.
Salesforce.com: an unwilling buyer
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*451 Group estimate, Source: The 451 M&A KnowledgeBase
Signing off on a deal
The bear just keeps grumbling – and we don’t mean the bear market. Instead, we’re talking about the all-the-rage bear hugs that companies are giving each other. The latest: Nuance Communications’ $40m unsolicited offer for Zi Corp. (Incidentally, the new hostilities come as a pair of previous unsolicited deals – Cadence Design Systems’ run at Mentor Graphics and Electronic Arts’ move on Take-Two Interactive – head toward largely civil conclusions.)
Nuance’s offer is a classic opportunistic squeeze play, right down to the timing. The acquisition-hungry company launched the bid just hours after Zi reported second-quarter results that did nothing to shore up its already weak standing on Wall Street. (Among the lowlights for Zi: Sales in the second quarter fell by one-third, and it burned through half its cash, which fell to just $2.6m from $5m at the beginning of the year.)
Still, Nuance sees some value in Zi, and Chris Hazelton, who heads up The 451 Group’s Mobile Practice, agrees. He notes that Zi’s handwriting-recognition technology would complement Nuance’s existing mobile offering. Handwriting recognition is particularly important in Asia, where symbols rather than letters are used in many writing systems. Of course, Asia is also a booming market for mobile products.
Nuance has already shown that it’s ready to go shopping in the mobile market. About a year ago, it spent $265m for Tegic Communications to get a keypad technology platform. And make no mistake, mobile is becoming an increasingly important slice of business for Nuance, which was formerly known for basic speech recognition on PCs. In Nuance’s most-recent quarter, revenue in its mobile business grew more than twice as fast as overall revenue, and the company projected that the division would account for 20% of total sales in the current fiscal year, up from just 13% last year.
We wouldn’t be surprised in the least if Nuance ended up ahead of its projection for its mobile business. The reason: We fully expect it to acquire Zi, which would add about $15m to the top line. Zi doesn’t want to sell – and told Nuance as much in an SEC filing – but we wonder how long the money-burning company can fend off Nuance. We’re guessing most Zi shareholders, who saw the stock sink to just 30 cents earlier this month, would like Zi to use its handwriting technology product to sign off on Nuance’s bid of 80 cents per share.
Selected unsolicited tech deals
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Source: The 451 M&A KnowledgeBase
Half-billion-dollar communications division up for grabs
Newly appointed interim VeriSign CEO Jim Bidzos is picking up where former CEO Bill Roper left off. In a recent conference call, Bidzos (who founded the company) reiterated VeriSign’s plan to shed many of the businesses picked up by the company’s longtime chief executive, Stratton Sclavos. (The acquisition-frenzied CEO inked more than a half-dozen deals in both 2005 and 2006, in addition to several headline-grabbing purchases at the height of the Internet bubble.) We believe VeriSign’s next divestiture is imminent, with the sale of its Communications Services division likely to go through shortly.
We have speculated on this in the past, but some recent developments suggest that a sale is close at hand. VeriSign placed the division in discontinued operations a few months ago, according to recent SEC filings. The unit, which provides communications services such as connectivity, interoperability and mobile commerce, is the largest and most profitable of the company’s non-core business segments. It pulled in $568m for the previous year, ending June 30. That’s down from $579m for calendar year 2007 and $804m in 2006. The decline is mostly related to VeriSign’s divestiture of Jamba, since sales in the rest of the division have been flat. That stagnation stands in contrast to VeriSign’s core business, the Internet Infrastructure and Identity Services division, which increased revenue 20% in the most recent quarter.
As to who might be interested in VeriSign’s Communications Services division, we have learned that there is at least one strategic buyer at the table. In fact, a deal was supposed to be signed, sealed and revealed with the company’s second-quarter earnings. But the transaction was delayed when the potential acquirer took a closer look due to the continued softness in the economy. We expect the divestiture to close soon. The most obvious strategic buyer of the unit is a big telecom shop – namely, Verizon or AT&T. Private equity has also expressed interest in the unit. But since the mystery bidder is said to be strategic, we believe a telco will likely end up as the new owner of VeriSign’s Communications Services unit for a price in the neighborhood of $1bn.
VeriSign’s communications acquisition binge
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Source: The 451 M&A KnowledgeBase
eBay places bid
EBay officially acknowledged rumors this week that it is in talks with Interpark to acquire its roughly 37% stake in Korean auction competitor Gmarket. Gmarket shares rallied 15% on the news. Should this transaction go through, we believe eBay would quickly hit the ‘buy it now’ button for Gmarket to establish control of the Korean auction market.
Amid a slowing U.S. auction business, eBay has been relying on its international operations for growth. For its recent second quarter ended June 30, eBay’s international revenue accounted for about 54% of total revenue. International revenue grew close to 30% year over year, while US revenue was up just 12%. Most of the international success, however, stemmed from eBay’s European operations, with German and UK operations accounting for more than half of international revenue.
Interpark announced that it was shopping its shares earlier this year, putting a $1.4bn price tag on Gmarket. This is a 15% premium over Gmarket’s current market cap of $1.23bn, and means eBay would have to shell out slightly more than $500m for the shares. That works out to 5.5x Gmarket’s trailing twelve-month (TTM) revenue of $254.34m and 31.4x TTM EBITDA of $44.56m. That’s a premium compared to eBay’s own valuation of 4x TTM revenue and 24x TTM EBITDA.
By acquiring Gmarket, eBay would get a company that understands the local market. Its failure to adapt to economic and cultural realities burned eBay with its first attempt to crack the Korean market. Former CEO Meg Whitman simply applied a template that had worked in the West and put the operation on cruise control. It seems that new CEO John Donahoe has learned from that mistake. Rather than continue the failed strategy of going it alone, we expect Donahoe to try to succeed in Asia through joint ventures and acquisitions of local competitors. Given the huge potential upside for further international growth by capturing that elusive Asian market share, this deal is likely the first of many.
Significant eBay acquisitions, 2005 – present
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Source: The 451 M&A KnowledgeBase