Category: technology stocks

Brocade on the block? Of course it is

Brenon Daly

Contact: Brenon Daly, Simon Robinson

Having recently marked the anniversary of its largest-ever acquisition, Brocade Communications may now find itself on the other side of a transaction. At least that’s the speculation from The Wall Street Journal, which reported Monday that the storage and networking giant has retained a banker (reportedly Frank Quattrone’s Qatalyst Partners) to shop it. While the report was enough to goose the stock to its highest level since June 2008 (shares were up 15% to $8.82 in Monday-afternoon trading), it’s worth pointing out that being shopped is a long way from getting sold.

It’s also worth mentioning that speculation about Brocade being in play is nothing new. As my colleague Simon Robinson noted in late March, the consolidating networking landscape makes Brocade a likely target. (After all, Brocade itself is an example of the consolidation. A traditional SAN networking provider, Brocade spent $2.6bn to expand into IP networking with its landmark purchase of Foundry Networks.) In the report, Robinson taps IBM as a likely buyer for Brocade as a way to gain an immediate presence in the networking space as well as strengthen its lead in the server sector. (Big Blue is one of the largest of Brocade’s OEM partners, which now number 23 companies.)

Hewlett-Packard is a less likely acquirer, in our view, because of the substantial overlap between HP’s newly reinvigorated ProCurve line and Foundry. That said, Brocade is a key supplier of datacenter infrastructure technology, so it is likely to be of interest to sever vendors like HP. Brocade’s appeal might be even sharper now that HP and Cisco Systems, which were once chummy, have found themselves on opposing sides in their efforts to equip the modern datacenters.

One additional buyer that certainly makes sense for Brocade, even more so because of a recently strengthened OEM arrangement, is Dell. The hardware provider, which has already bought its way into storage and other IT infrastructure markets, recently bolstered its OEM arrangement with Brocade to include IP networking and fiber-channel-over-Ethernet gear. (For the record, the WSJ article doesn’t mention Dell as a possible acquirer but, inexplicably, includes Oracle as a suitor. We suspect that Larry Ellison has plenty of other areas of software to consolidate before a hardware-heavy purchase that pits Oracle against Cisco.)

In terms of valuation, we would note that with the M&A-inspired speculative buying, Brocade shares have more than tripled so far this year. (Trading in Brocade stock through mid-Monday was already more than five times heavier than average.) The run has given Brocade an enterprise value (EV) of $4bn, including the jump on Monday. That values it at almost exactly the same level as Cisco on an EV-to-trailing-EBITDA valuation and a slight discount to the networking giant on an EV-to-trailing-sales multiple.

Starting strong, once again

Brenon Daly

Contact: Brenon Daly

For the second time this year, the first day of a new quarter brought with it a multibillion-dollar transaction. Back on April 1, Fidelity National Information Services opened the second quarter by announcing its $2.9bn all-equity acquisition of Metavante. (The deal closed yesterday.) And to start the fourth quarter on October 1, Cisco said it plans to spend $3bn in cash for Tandberg, the Norwegian maker of video and network infrastructure technology. The purchase, which is expected to close in the first half of 2010, should bolster Cisco’s TelePresence product.

Cisco’s reach for Tandberg stands as the company’s largest acquisition since it paid $3.2bn in cash for WebEx Communications in March 2007. The transaction also continues a flurry of recent deals. September came in with the highest spending of any month so far this year, with significant acquisitions announced by Xerox, Adobe, CA Inc and Dell, among others. In fact, September alone accounted for two-thirds of all M&A spending in the just-completed third quarter. (See our full report on the numbers and trends in the third quarter.)

Recent deal flow

Month Deal volume Deal value
September 2009 243 $22bn
August 2009 222 $4bn
July 2009 274 $9bn

Source: The 451 M&A KnowledgeBase

A ‘new normal’ for tech M&A

Brenon Daly

Contact: Brenon Daly

With the third quarter now in the books, we’re busy tallying the buying that went on over the past three months. Not that it involves all that much work, actually. In fact, for all the talk of how much better off we are now than at this time last year, you wouldn’t know it from the M&A levels in the third quarter, which wrapped yesterday.

And just to qualify, when we say ‘better off,’ in most cases we mean ‘less worse off.’ It’s true, for instance, that jobless rates aren’t rising as fast as they once were, but they are still rising. That sentiment is mirrored in statistics covering many other areas of the economy as well, although is does go against the 15% rise in the Nasdaq over the summer.

So where do these currents and crosscurrents leave us in terms of numbers of third-quarter deals and the spending on them? In the just-completed July-September period, we recorded 740 transactions with an aggregate announced value of $34bn. That lines up nearly identically with the 733 deals worth $32bn in the third quarter of 2008, which saw the beginning of the historic credit crisis. Further, the third-quarter results continue the trend of measuring tech M&A spending in the tens of billions of dollars, compared to the $100bn quarters that we saw regularly during the boom years. Our take: there’s a ‘new normal’ in tech M&A.

Recent quarterly M&A activity

Period Deal volume Deal value
Q3 2009 740 $34bn
Q2 2009 767 $48bn
Q1 2009 654 $10bn
Q4 2008 725 $40bn
Q3 2008 733 $32bn
Q2 2008 719 $173bn
Q1 2008 836 $55bn

Source: The 451 M&A KnowledgeBase

Long an LBO target, ACS goes to Xerox

Brenon Daly

Contact: Brenon Daly

Finally, Darwin Deason does his deal. The chairman and overwhelmingly largest shareholder of Affiliated Computer Services (ACS) has had the IT services company he founded in 1988 in play for some time now. The firm was approached by an unnamed private equity (PE) shop some four years ago, but talks were scrapped in January 2006. Then came Cerberus Capital Management, which put forward a $5.9bn bid in March 2007, only to pull it some three months later as the credit markets started tightening. Finally, on Monday, Xerox said it will buy ACS for $6.4bn in cash and stock. (Incidentally, Xerox shares were worth quite a bit less after the announcement, dropping 19% in Monday-afternoon trading.)

It’s noteworthy that a strategic acquirer has replaced PE shops as the buyer of the slow-but-steadily growing services company. We would chalk that up to the recent changes in the credit market. When debt was cheap and plentiful, buyout shops could afford to give up ‘synergies,’ knowing they could make a return because of the low cost of capital. (And the synergies can add up. Xerox expects to save $300-400m in the first three years by cutting duplicate costs and other financial advantages of the combination.) ACS has some $2.3bn in debt, which Fitch gives a ‘speculative’ rating of BB.

Although Deason stepped upstairs at ACS three years ago, he still controls some 44% of the voting stock in the company. (His outsized control in the vendor comes primarily through his ownership of all of the Class B shares of ACS, which carry 10 votes per share.) Looking at the rest of ACS’ board helps to explain at least one other part of the transaction as well, the fact that ACS was advised by Citigroup Global Markets. Longtime Citigroup executive Robert Druskin has served on the ACS board since March 2008. Additionally, Evercore Partners advised the board at ACS. On the other side, JP Morgan Securities and Blackstone Group advised Xerox.

Solid-state storage market: OEM now, M&A later?

Brenon Daly

Contact: Brenon Daly

As buoyant as the Nasdaq has been so far this year, few stocks can come close to matching the stunning 10-fold rise of STEC Inc. After opening the year at about $4, shares in the maker of solid-state drives (SSDs) inched above $40 earlier this month. Perhaps inevitably, gravity (in the form of Wall Street concern over increased competition) has pulled STEC back down over the past week. Shares closed Wednesday at $30.85, leaving the company still with a cool $1.5bn market capitalization.

In a recent report, my colleague Henry Baltazar notes that STEC is the central player in the emerging SSD segment, one that could very well change the face of the multibillion-dollar server and storage markets. SSDs are much faster and far more efficient than traditional hard drives and disk-based storage arrays. Also, the prices of SSDs have come down sharply as they have moved from costly DRAM-based to flash-memory-based drives. Taken together, the pitch of ‘better, cheaper, faster’ has spurred phenomenal growth in the SSD space. For its part, STEC’s sales are projected to hit $350m in 2009, an increase of more than 50% in the midst of one of the softest IT spending environments in recent years.

This trend, of course, hasn’t gone unnoticed by the server and storage giants. So far, however, when these companies have run the ‘buy-build-partner’ calculus for the SSD sector, most have opted to partner. STEC, for instance, has OEM deals in place with nearly all of the major server and storage players, including IBM, Hewlett-Packard and a longstanding accord with EMC. As mentioned, though, competition is heating up as startups look to get established in this fast-growing market. New companies entering the space include Pliant Technology and SandForce (neither of which has announced any OEM agreements of its own so far), plus Fusion-io, which has OEM deals with HP and IBM, as well as reseller agreements with Dell and other vendors. If the SSD market continues to take off, we could certainly imagine one or more of these startups getting snapped up.

Correlated markets?

Brenon Daly

Contact: Brenon Daly

To look at the recent performance of the Nasdaq, you’d hardly know that capitalism (as we know it) almost died a year ago. The tech-heavy index was largely unchanged on Wednesday but has posted gains for three straight sessions, having added 9% so far in September. That’s part of a longer run that has seen the Nasdaq tack on 35% since the beginning of 2009 and 70% since bottoming out in early March. In fact, the index is essentially where it was a year ago, before banks started going under, the credit market froze and the US government fired up its printing presses to give us all enough money to buy our way out of the recession.

The optimism that’s been boosting the equity markets is starting to carry over to the M&A market, with several signs from big-time buyers pointing to a return to health:

  • Dell’s recent reach for Perot Systems stands as the largest tech transaction in five months.
  • Google inked its second acquisition in as many months, after being out of the market for nearly a year. (The search giant added reCAPTCHA last week after picking up On2 Technologies in early August, its first purchase of a fellow public company.)
  • Adobe and CA Inc announced their largest deals in four-and-a-half years and three-and-a-half years, respectively, in the past week.
  • Microsoft grabbed a bucketful of small companies to add technology to its ERP division, a business that has largely been shaped by a pair of billion-dollar buys earlier this decade.

Of course, we need to consider this resurgence of deal flow in the context of an overall sluggish M&A market. With a week and a half left in the third quarter, spending on deals is running at just $28bn. While that would put activity roughly on par with where it was last year, it is only half of the amount of third-quarter spending in 2007 and one-third of the total in Q3 2006. Another way to look at it: the roughly $84bn that we’ve seen so far for all of 2009 is basically what we used to see in a single quarter during the boom years.

Q3 tech M&A activity

Period Deal volume Deal value
Q3 2009 (through August 22) 672 $27bn
Q3 2008 733 $32bn
Q3 2007 825 $58bn
Q3 2006 1,029 $102bn
Q3 2005 811 $87bn

Source: The 451 M&A KnowledgeBase

Dell-Perot Systems: an expensive Texas tie-up

Brenon Daly

By Brenon Daly

To understand just how richly Dell’s bid values Perot Systems, consider this: the last time shares in the services company traded at the level Dell is paying, Dell’s own long-slumping stock was changing hands above $40. That was back in early 1999, just after Perot Systems went public. (As a side note on the IPO, five banks are listed on the prospectus; Goldman, Sachs, which advised Perot in Monday’s sale to Dell, is not one of them.) By early 2000, shares of Perot had dropped to below $20, and never again pierced the $20 level, much less the $30 for each share that Dell is handing over in its proposed $3.9bn purchase.

The offer means Dell is paying a price for Perot that the company hasn’t seen on its own in a decade. Put in numbers, Dell’s bid values Perot at 68% above the closing price in the previous session, and some 78% higher than the average price of shares over the prior 30 trading days. For its part, Dell stock was bouncing around $16 on Monday, having dipped about 4% on the announcement.

And when compared to a similar move by a hardware vendor to bolster its services arm, Dell’s planned purchase of Perot comes in at about twice as expensive as Hewlett-Packard’s $13.9bn reach for EDS in May 2008. Dell is paying 1.4 times trailing 12-month (TTM) revenue and 12.9 times TTM EBITDA for Perot. That compares to HP’s acquisition, which valued EDS at 0.6 times TTM sales and 5.7 times TTM EBITDA.

Intuit mints a rich deal

-Contact Thomas Rasmussen, Brenon Daly

We might be inclined to read Intuit’s recent purchase of Mint Software as a case of ‘If you can’t beat ’em, buy ’em.’ The acquisition by the powerhouse of personal finance software undoubtedly gives the three-year-old startup a premium valuation. Intuit will hand over $170m in cash for Mint, which we understand was running at less than $10m in revenue. (Although we should add that Mint had only just begun looking for ways to make money from its growing 1.5-million user base.)

More than revenue, we suspect this deal was driven by Intuit’s desire to get into a new market, online money management and budgeting, as well as the fear of the prospects of a much smaller but rapidly growing competitor. (Intuit and Mint have been talking for most of this year, according to one source.) In that way, Intuit’s latest acquisition has some distinct echoes of its previous buy, that of online payroll service PayCycle. For starters, the purchase price of both PayCycle and Mint totaled $170m. And even more unusually, bulge bracket biggie Goldman Sachs advised Intuit on both of these summertime deals. (Remember the days when major banks would hardly answer the phone for any transaction valued at less than a half-billion dollars? How times change.) On the other side of the table in this week’s deal, Credit Suisse’s Colin Lang advised Mint.

Intuit M&A, 2007 – present

Date Target Deal value
September 14, 2009 Mint Software $170m
June 2, 2009 PayCycle $170m
April 17, 2009 BooRah <$1m*
December 3, 2008 Entellium $8m
December 19, 2007 Electronic Clearing House $131m
November 26, 2007 Homestead Technologies $170m

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

‘What’s up with Omniture?’

Brenon Daly

Contact: Brenon Daly

It wasn’t quite shouting ‘fire’ in a crowded theater, but an early Tuesday afternoon development at an investment conference concerning Omniture certainly sparked a firestorm of speculation. During the luncheon at ThinkEquity’s 6th Annual Growth Conference in San Francisco, word came out that Omniture had scrapped its presentation, which had been scheduled for 1:30 p.m. PST. Chief executive Josh James was slated to speak.

Immediately, the money managers began trying to read between the lines. Was the company in play, or had James just missed his flight or something like that? Speculation was flying around the lunch tables and hallways, with people pulling in all sorts of information. One guy noted that the company’s CFO didn’t show up at his scheduled presentation at Deutsche Bank’s technology conference on Monday, either. Another chimed in that maybe executives were delayed by the heavy thunderstorms in Salt Lake City, where Omniture is based. Meanwhile, both the price and trading in shares of Omniture was picking up, after just bumping along up to that point.

As more people at the ThinkEquity conference started gossiping about Omniture, consensus grew that something big was brewing at the Web analytics firm. By the time the stock was halted, just ahead of the closing bell, speculation had shifted to certainty: Omniture was getting taken out. The only question was who was nabbing the company. For the record, not a single one of the hallway matchmakers picked Adobe Systems as the buyer. (Under terms of the deal, Adobe will hand over $21.50 per share, or $1.8bn, for Omniture.) Instead, the names that surfaced as potential acquirers of Omniture included Microsoft, Google and Salesforce.com.

M&A market timing at CA

Brenon Daly

Contact: Brenon Daly

After a two-year hiatus that ended last fall, CA Inc has returned to the market with newfound enthusiasm. With the vendor’s purchase on Monday of network performance management provider NetQoS, CA has now inked six acquisitions over the past 12 months. That comes after an extended period (September 2006 to October 2008) when the normally acquisitive company stepped out of the market entirely.

During that time, CA’s four large rivals (BMC, Hewlett-Packard, IBM and Symantec) announced a total of 61 transactions between them. Collectively, the quartet of buyers paid roughly 5.7 times trailing 12-month (TTM) revenue in the deals they did. (That’s the median valuation from the more than 20 transactions that either had terms disclosed or where we estimated the numbers.)

So from CA’s perspective, sitting out a period marked by historically high valuations might not be a bad thing at all. Consider this: CA’s purchase of NetQoS cost it $200m in cash, which worked out to 3.6x TTM sales. If we slap the prevailing multiple from the period CA was out of the market (5.7x TTM sales) onto CA’s most-recent deal, the price for NetQoS swells to $320m. Obviously, there were vastly different assumptions about growth rates in late 2006 and early 2007 than there are now, which goes a long way toward explaining the nearly 40% ‘discount’ that CA got by inking the NetQoS purchase on Monday rather than when the market was hot.