Category: technology stocks

Companies buying early and often in 2010

Brenon Daly

Contact: Brenon Daly

Maybe it was just working through the backlog of deals from the holiday break, but M&A has started strongly in 2010. We previously noted that a number of big tech buyers have already announced deals this year. (The list of acquirers in the first workweek of January includes EMC, Oracle, Cisco Systems and Apple, among others.) Overall, we tallied 85 transactions in the first week back at our desks, a stunning 60% increase over the first workweek of 2009.

Granted, making projections from a single week is a bit dubious because of the small sample size. Yet while it may not be unerringly precise, it will likely prove directionally accurate. Consider how M&A played out in 2009. In the first week of January, we counted just 53 transactions, giving a projected total for the year of 2,756 deals. That turned out not to be too far off the actual total for 2009 of 3,005 transactions.

If we make the same calculation based on the 85 deals that we counted in the first workweek of this year, we get a projected total of 4,420. That will likely prove too high for the year since it would substantially eclipse the record activity we saw in the boom year of 2006, when there were a lot more buyers at the table. Still, the busy start to 2010 does appear to indicate that this year will be more active than last year. If you are interested in our full outlook for M&A in 2010, join us on our webinar tomorrow at 10:00 a.m. PST/1:00 p.m. EST. To register, click here.

Chordiant: hunter turns hunted

Brenon Daly

Contact: Brenon Daly

Just a month ago, Chordiant Software was a hunter. Now it’s the hunted. The call-center software vendor attracted an unsolicited – and rather unsatisfying – offer from CDC Software earlier this week. The unusual twist is just the latest development in the already unusual process around the sale of fellow software company Kana Software. Recall that Chordiant, after failing to land Kana, took to sniping at the deal as an activist shareholder. None of that had any impact, as the sale of Kana to midmarket buyout firm Accel-KKR closed in late December.

Chordiant’s unsuccessful bid for Kana came up in CDC’s rationale for making what it terms a ‘proactive’ offer for Chordiant, with acquisitive CDC saying the bid was partly driven by Chordiant’s recognition that it was a ‘sub-scale’ software company. And recently, Chordiant has been falling even further away from being a software vendor of scale. In its most recent fiscal year, which ended September 30, overall revenue dropped by one-third. Granted, that fiscal year covered one of the most difficult economic periods since the Great Depression. But even in the current fiscal year, most Wall Street analysts don’t project that Chordiant will grow much, if at all.

So what does all that mean for Chordiant, which has remained silent to this point on CDC’s offer of $105m in cash and stock? We suspect it’ll probably play out similarly to CDC’s bid in 2006 for another CRM provider, Onyx Software. In that would-be acquisition, CDC was also an unwelcome bidder for Onyx, and the process unfolded fitfully. (Onyx ultimately sold to rollup Consona.) Not that we’re saying CDC will necessarily pull its bid for Chordiant, as it did for Onyx.

Instead, on the other side, we suspect Chordiant will try everything in its power not to end up inside CDC. One key defense: Chordiant has a poison pill in place that doesn’t expire until mid-2011. Also, Chordiant shares are currently changing hands above CDC’s offer of $3.46 for each of them. So if CDC, which is planning to hit the road next week to help sell Chordiant investors on the deal, really wants to add Chordiant’s front-office products to its existing back-office wares, we think it’ll have to present a topping bid. On a call discussing the proposed transaction Friday, CDC chief executive Peter Yip said he’s ‘open minded’ to raising the offer.

Survey says: Companies ready to deal again

Brenon Daly

Contact: Brenon Daly

This year’s fast start to M&A activity by several of the big-name tech buyers (EMC, Cisco Systems, Apple and Oracle, among others) shouldn’t surprise us at all. After all, when we surveyed corporate development executives last month, two-thirds of them said they expected their firms to pick up the pace of dealmaking in 2010. That’s a far more bullish outlook than their projections last year, when the entire financial services industry and much of the broader economy appeared to be collapsing. At that time, some 23% of respondents said they expected to actually slow their acquisition activity amid all the uncertainty that loomed in the coming year. In our most recent survey, just 5% said they see a slowdown in dealmaking.

We’ll have a full report on the results of our annual 451 Group Tech Corporate Development Outlook Survey in tonight’s Daily 451 and 451 TechDealmaker sendouts. But we would add that the bullishness for M&A in the coming year expressed by our respondents extends far beyond just their projected activity. In both the types of transactions and even the structure of them, companies indicate that they have thrown off much of the conservatism and caution that characterized their outlook in late 2008 and are once again open to risk. And finally, they plan to be busy even though they tell us they’re likely to pay more in the deals they ink in 2010. It’s a dramatic turnaround from the previous year, so look for the full report on the survey tonight.

Projected change in M&A activity in the coming year

Year Increase Stay the same Decrease
2009 68% 27% 5%
2008 44% 33% 23%

Source: The 451 Group Tech Corporate Development Outlook Survey

Charting the market

Brenon Daly

Contact: Brenon Daly

To get a sense of the relative health of the overall M&A market, it’s often more revealing to look at a specific sector and chart the valuation fluctuations over time. Take the highly visible – and rapidly consolidating – market for governance, risk and compliance (GRC) software. (Or, as my colleague Paul Roberts would have it: GRC stands for governance, risk and consolidation.) Since GRC straddles a number of technology areas (security, BI, performance and policy management, and others), it’s natural that we’ve seen a steady flow of deals across this sector. (We highlighted that in a report last spring where we offered our own (admittedly weak) take on the GRC acronym: ‘Get Ready for Consolidation.’)

Conveniently enough, we’ve seen a number of GRC deals inked recently that encapsulate the state of the broader space. (This isn’t meant to be a comprehensive tally of deal flow in the sector, but rather a selection of illustrative transactions.) Back when the markets were soaring in 2006, SAP paid an estimated 10 times trailing sales for Virsa Systems. By late 2007, the multiple that Sun Microsystems paid for Vaau had come down to an estimated 7x trailing sales. (Incidentally, Sun announced that purchase right as the Nasdaq, which had been at its highest level since early 2001, began a protracted slide that ultimately cut the index by more than half. It still hasn’t recovered to the level of November 2007.)

A year later, the multiple had been cut in half, with Thomson Reuters paying an estimated 3x trailing sales for Paisley. The upheaval in the early part of last year put even more pressure on valuations, with McAfee paying just 2.5x trailing sales for Solidcore Systems. And then on Monday, EMC announced that it was making its own GRC play, reaching for industry veteran Archer Technologies. While terms weren’t disclosed, we’re pretty confident that Archer’s valuation rebounded from the level that Solidcore got just six months ago. We understand that Archer finished last year with about $32m in sales, and would guess that it sold at a price in the neighborhood of $200m, meaning they got twice the multiple Paisley got a year ago.

A happy New Year

Brenon Daly

Contact: Brenon Daly

Much is made about how the opening days of trading tend to set the tone for the equity markets each year. (If that’s the case, Monday’s strong performance of both the Dow Jones Industrial Average and the Nasdaq Composite Index would indicate a pretty bullish 2010.) And since there is a correlation between the equity markets and the M&A market, we thought we’d note that deal flow in the New Year is also starting strong. The first full business day of 2010 saw big-name acquirers such as EMC and Thomson Reuters both reach for startups.

Actually, the opening flurry of deals in 2010 continues a pickup in M&A that really took hold in the final quarter of 2009. With the US economy growing again in the fall – after a year and a half of contraction – companies started shopping again. (The 12% surge in the Nasdaq in the fourth quarter also undoubtedly helped confidence.) With a few late-2009 deals still to tally, we project spending on fourth-quarter tech M&A will come in at about $55bn. That’s the highest level since the second quarter of 2008 and represents a 45% increase over spending in the fourth quarter of 2008. As for the outlook for the balance of 2010, two-thirds of tech bankers we recently surveyed told us their pipelines are fuller now than they were a year ago.

Quarter-by-quarter M&A totals, 2008-09

Period Deal volume Deal value
Q1 2008 839 $57bn
Q2 2008 719 $173bn
Q3 2008 733 $32bn
Q4 2008 724 $38bn
Q1 2009 659 $10bn
Q2 2009 770 $48bn
Q3 2009 757 $38bn
Q4 2009 784 $55bn

Source: The 451 M&A KnowledgeBase

And the Golden Tombstone goes to …

Brenon Daly

Contact: Brenon Daly

We survey corporate development executives every year to get a sense of their shopping plans for the next 12 months. We’ll have a full report on the survey when we return from our holiday break in early January, but the headline finding is that two-thirds of the respondents expect the pace of M&A at their firms to pick up in 2010, compared to just 5% who see the rate tailing off. We would note that bullishness is echoed by technology investment bankers, who we also recently surveyed. (See our full report on the tech bankers’ survey.)

In addition to getting their outlook for the coming year, we also ask corporate development executives to pick a single deal that stood out to them as the most significant transaction of the year. The 2009 winner? Oracle’s still-pending $7.4bn acquisition of Sun Microsystems. Larry Ellison’s big gamble on hardware received twice as many votes as the second-place transaction, Hewlett-Packard’s reach for 3Com last month. (HP won the award last year for its purchase of services giant EDS.) Third place was claimed by EMC’s aggressive grab of Data Domain.

From our perspective, it’s fitting that Oracle’s purchase gets the coveted Golden Tombstone for 2009. (As an aside, it’s unintentionally accurate to be referring to ‘tombstones’ in connection with deals this year, if just because the M&A market was as quiet as a cemetery.) After all, 2009 has been characterized by transactions that are cheaper but take longer to close than in years past. Oracle, which announced the purchase of Sun in April but still hasn’t gotten full approval for it, is paying just 0.6x trailing sales for the faded tech giant. It was that kind of year for M&A, and one we’ll gladly put behind us. Here’s to a healthy and happy 2010 when we return from a much-needed break.

Golden Tombstone winners

Year Transaction
2009 Oracle’s $7.4bn purchase of Sun Microsystems
2008 HP’s $13.9bn acquisition of EDS
2007 Citrix’s $500m XenSource buy

Source: The 451 Corporate Development Outlook Survey

The market and Meru

Brenon Daly

Contact: Brenon Daly

Having watched at least three of its rivals get acquired in recent years, Meru Networks is now aiming for the other exit: a public offering. The WLAN equipment maker filed its IPO paperwork on Friday for an $86m offering to be led by Bank of America Merrill Lynch, with co-managers Robert W. Baird & Co, Cowen & Co, JMP Securities and ThinkEquity. Meru plans to trade on the NYSE under the ticker MERU. (Incidentally, the company was one we put on our list of IPO candidates for 2010 in our recently published 2010 M&A Outlook – Security and networks.)

If Meru does manage to make it onto the public market, it will reverse the flow of deals in the sector. In recent years, a large publicly traded rival (Symbol Technologies) and two other competing startups (Colubris Networks and Trapeze Networks) have all been acquired. Those trade sales have valued the WLAN equipment vendors at a range of 2.1-3x trailing 12-month (TTM) sales.

We noted a year and a half ago that all of the transactions probably meant that Meru would have trouble finding a buyer, except among public market investors. Not that Meru hasn’t kicked around a possible sale in the past. Rumors have tied it to both Juniper Networks and Foundry. The Foundry relationship seems to have died off since Foundry sold to Brocade Communications. According to Meru’s S-1, Foundry/Brocade accounted for a full 35% of its revenue in 2007, but that level has fallen to less than 10% now.

With Meru aiming to hit the market in 2010, we suspect that it will be hoping to have a stronger offering than publicly traded rival Aruba Networks, which initially priced its shares in its March 2007 offering at $11 each. Although Aruba traded above the offer price for almost a year, it broke issue in February 2008 and has not traded above the initial price since then. That said, the stock is nearing that level, changing hands at about $10.65 in midday trading Tuesday. It has more than quadrupled in 2009. The dramatic rebound in Aruba shares has pushed the firm’s valuation to 4.6x TTM sales. Applying that same multiple to Meru’s $67m TTM sales gives the company a valuation of about $310m.

Tech bankers: Business is back

Brenon Daly

Contact: Brenon Daly

Every year, we survey our investment banking contacts to get a sense of what they anticipate for both their business and the overall technology M&A market in the coming year. The results this year seem to fully indicate that the recession that flattened business – and entire institutions – in 2009 will give way to a busier and more vibrant dealmaking market in 2010. Bankers projected that activity will pick up across virtually every part of the business, including the IPOs and private equity buyouts that had all but disappeared this year.

Altogether, the results show a stunning turnaround from our previous survey. (See our report on last year’s survey.) Of course, 2008’s survey went out when the Nasdaq was trading around 1,550 amid the historic upheaval and blood-letting on Wall Street caused by the credit crisis. As devastating as the crisis seemed at the time, it has actually turned out to be a boon for most. More than half of the bankers responded that those unprecedented changes actually boosted their firm’s opportunities – and they expect to be hiring to handle the additional work they see coming in 2010.

The main reason why the banks see the need to hire is that business has recovered dramatically. When we asked bankers to gauge their current pipeline compared to where it was at this time last year, the recovery was striking. Two-thirds said the dollar value of mandates on the deals they are currently working on is higher than it was in late 2008. In the 2008 survey, half of the bankers said their pipeline was drier. Look for our full report on the survey in tonight’s 451 Group MIS sendout.

Change in number of formal tech mandates

Pipeline volume 2006 2007 2008 2009
Increase 84% 70% 39% 67%
Increase 25% or more 58% 31% 9% 39%
Decrease 4% 13% 34% 19%

Source: Annual 451 Tech Banking Outlook Survey

Kana: bidding while the cash burns

Brenon Daly

Contact: Brenon Daly

The progression from spurned bidder to shareholder activist isn’t all that unusual. But it is unusual when the party smarting is a publicly traded company, and decides to express its agitation through press releases. Yet, that’s exactly how Chordiant Software is venting its frustration over not landing Kana Software, with Chordiant telling the world earlier this week that it plans to vote its shares (amounting to 4% of the total equity outstanding) against the proposed sale of Kana’s operating business to midmarket buyout firm Accel-KKR. Chordiant followed that up on Thursday evening with a new cash-and-stock offer that values Kana higher than the buyout bid.

All of this comes just days before shareholders are slated to vote on Accel-KKR’s offer (the vote is scheduled for Wednesday). Kana’s board continues to recommend that shareholders back the planned transaction, which would effectively carve the business out of Kana and leave only a shell company in its place. We have noted that it’s an imperfect structure, but one that probably serves the fundamentally flawed firm reasonably well. Of course, some shareholders (including Chordiant) don’t agree, and should vote however they want. We would only note that while the two sides argue, Kana continues to burn cash. At the end of its most-recent quarter (ending September 30), the company was down to just $1.8m (it started the year with $7m). While the cash burn is nothing new for Kana, which has lost $4.3bn since its inception, it could become pressing: Kana noted in its proxy that it has a $5.4m debt payment coming due in 2010.

Sailing around the market with Cisco

Brenon Daly

Contact: Brenon Daly

There are a lot of ways to chart the pickup in M&A activity over the course of 2009. In our recently published M&A Outlook, we cover a lot of the empirical indications, including the fact that spending on deals in the second half of 2009 is tracking 50% higher than in the first half of the year, as well as that the median valuation for fourth-quarter transactions is the highest we’ve seen in the year since the credit crisis erupted.

But our favorite way to encapsulate the changes between the climate a year ago and right now isn’t through data but through anecdote. (Of course, there are those who joke that ‘data’ is just the plural of ‘anecdote.’) Last year, we recall Cisco Systems’ CEO John Chambers ominously remarking that the economy was in ‘uncharted waters.’ Cisco is often considered a bellwether for the broader tech industry, and the company has been a particularly active shopper. Over the past five years, Cisco has spent more than $20bn to buy its way into new markets.

Not that Cisco – or any other company, for that matter – was doing much of that in early 2009. Since then, however, the waters have gotten more navigable. That certainty has helped Cisco step back in the market, with a pair of $3bn transactions as well as its $183m pickup of on-demand security firm ScanSafe. We suspect that signals like that may well encourage other corporate buyers to perhaps at least revisit some of the deals that were put on pause earlier this year. Merely working through that backlog could get M&A off to a strong start in 2010.