Category: technology stocks

Informatica: Just dating or something more?

Brenon Daly

Contact: Brenon Daly, Krishna Roy

Is it just dating, or are they looking to get married? That was a question that Wall Street was kicking around last week after Hewlett-Packard and Informatica announced a deeper relationship. The new accord sees HP licensing a number of Informatica’s offerings so that it can provide its customers with data management products. HP is also supplying these same wares from Informatica as part of its existing consulting services for business intelligence (BI) and related arenas and pushing these combined offerings through its direct sales force. (My colleague Krishna Roy has a full report on the tie-up.)

The announcement, which came out last Tuesday, didn’t initially generate much speculation about the relationship between the two longtime partners. However, by Friday, Wall Street was reading much more into the joint agreement. Shares of Informatica rallied almost 7% on Friday, with volume more than three times heavier than average. (The rally continued a strong run by Informatica, which has seen its shares gain some 56% so far this year, vastly outpacing the 32% advance for the Nasdaq in 2009.)

However, both HP and Informatica have taken great pains to position themselves as independent software providers. Indeed, even as HP announced that it would be doing more with its relationship with Informatica, it also clearly said that it will continue to work with other data management and BI vendors. And on the other side, we noted that ‘neutrality’ may have come up in rumored talks last year between Informatica and Oracle. In any case, the independence and openness stand in contrast to the moves in this market by IBM – the rival that’s the primary target of the deeper HP-Informatica partnership. Big Blue spent $1.14bn in cash in March 2005 for Ascential Software, an acquisition that most observers would say hasn’t delivered.

VeriSign’s bargain bin of deals

-Email Thomas Rasmussen

We’ve been closely watching VeriSign’s grueling divestiture process from the beginning. One year and $750m in divestitures later, VeriSign is largely done with what it set out to do. The company finally managed to shed its messaging division to Syniverse Technologies for $175m recently. Although we have to give the Mountain View, California-based Internet infrastructure services provider credit for successfully divesting nine large units of its business in about a year during the worst economic period in decades, we nonetheless can’t help but note that the vendor came out deeply underwater on its holdings. From 2004 to 2006 it spent approximately $1.3bn to acquire just shy of 20 differing businesses, which it has sold for basically half that amount. (Note that the cost doesn’t include the millions of additional dollars spent developing and marketing the acquired properties, nor the time spent on integrating and running them, which undoubtedly hurt VeriSign’s core business.)

Aside from the lawyers and bankers, the ones who really benefitted from VeriSign’s corporate diet were the acquirers able to pick up the assets for dimes on the dollar. And in most cases, the buyers of the castoff businesses were other companies since the traditional acquirers of divestitures (private equity firms) were largely frozen by the recent credit crisis. The lack of competition from PE shops, combined with the depressed valuations across virtually all markets, means the buyers of VeriSign’s divested businesses scored some good bargains. Chief among them are TNS and Syniverse, which picked up the largest of the divested assets, VeriSign’s communications and messaging assets, respectively. Wall Street has backed the purchases by both companies. Shares of TNS have quadrupled since the company announced the deal in March, helped by a stronger-than-expected earnings projections this year. More specifically, Syniverse spiked 20% on the announcement of its buy, which we understand will be immediately accretive, adding roughly $35m in trailing 12-month EBITDA.

VeriSign’s divestitures, 2008 to present

Date Acquirer Unit sold Deal value
August 25, 2009 Syniverse Technologies Messaging business $175m
May 26, 2009 SecureWorks Managed security services $45m*
May 12, 2009 Paul Farrell Investor Group Real-Time Publisher Services business Not disclosed
March 2, 2009 Transaction Network Services Communications Services Group $230m
February 5, 2009 Sinon Invest Holding 3united Mobile Solutions $5m*
May 2, 2008 MK Capital Kontiki Not disclosed
April 30, 2008 Melbourne IT Digital Brand Management Services business $50m
October 8, 2008 News Corporation Jamba (remaining 49% minority stake) $200m
April 9, 2008 Globys Self-care and analytics business Not disclosed

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

Take-privates are taking more money

Brenon Daly

Contact: Brenon Daly

Even though the volume of take-privates has plummeted this year, the deals that are getting announced appear to be far more competitive than they’ve ever been. At least that’s true after the LBO is announced. So far this year, we’ve seen terms get raised in four take-privates, due to either named or unnamed bidders.

The latest: On Tuesday, an unidentified private equity (PE) firm offered $8 for each share of MSC Software, topping the existing agreement for $7.63 per share that buyout shop Symphony Technology Group had with the maker of design software. The new bid added about $18m to the price of MSC. That follows post-announcement raises in the LBOs of I-many and Entrust, which increased the final purchase prices by $19m and $9m, respectively. And then there was the bidding war over SumTotal Systems between Vista Equity Partners and Accel-KKR that saw the final price come in 50% higher than the initial offer.

But in the case of MSC, we probably shouldn’t be surprised that the initial offer got bumped a bit higher. After all, it was only a scant 13% premium over the previous closing price. Shares of the company actually traded at the price proposed by Symphony just a month before the PE shop unveiled its bid. Although to be fair, much of the run had been triggered by speculation that hedge fund Elliott Associates, the vendor’s largest shareholder, was pushing for a sale of MSC. (Under the plan put forward by Symphony, Elliott would have rolled over its equity.) For the record, the proxy filed in connection with Symphony’s bid indicates that Elliott actually first broached the idea of a sale to MSC in February 2008, a time when shares were changing hands above $12 each.

An Old Economy version of Microsoft-Yahoo?

Brenon Daly

Contact: Brenon Daly

Where have we heard this before? A diversified, dividend-paying company makes an unsolicited approach to a target that’s only just into a restructuring program, with a goal of bolstering a business where it’s currently an also-ran. Add to that, the would-be acquirer isn’t particularly known for its brass-knuckle M&A tactics, while the would-be acquiree is busy dealing with an activist shareholder. No, Microsoft isn’t reheating its offer for Yahoo from early 2008. Instead, it looks to us like Kraft Foods has borrowed that play in its reach for candy company Cadbury.

Actually, the Old Economy rendition of Microsoft-Yahoo appears to be simply a cheaper version. For starters, there’s deal size. Microsoft’s bid of some $45bn for Yahoo is nearly three times the amount that Kraft has initially put forward for Cadbury. (We say ‘initially’ because Cadbury is trading above Kraft’s current cash-and-stock offer.)

Also, Microsoft offered a substantially richer premium for Yahoo than Kraft has indicated for Cadbury, roughly twice the level. And, Microsoft’s bid valued Yahoo at roughly 32 times trailing EBITDA, about twice the multiple that Kraft is planning to hand over for its reluctant partner. Of course, none of the largess flowing from Microsoft was enough to sway Yahoo’s board or executives, much to the dismay of shareholders in the search company. Yahoo shares currently change hands at less than half the amount Microsoft offered for them some 18 months ago.

Summer sun dries up deal flow

Brenon Daly

Contact: Brenon Daly

It really was the lazy days of summer, at least in terms of tech deal-making. With summer officially wrapping up on Labor Day, spending on M&A is running at less than one-fifth the level it has been in any of the three previous years. (For our purposes, we mark summer as beginning on Memorial Day and ending on Labor Day.) In that period this year, acquirers spent a mere $18bn – down from $139bn in the same period in 2008, $101bn in 2007 and $123bn in 2006.

And spending has slowed recently, dipping to just $4.3bn since August 1. (Nearly half of that came in a single transaction, eBay’s divestiture of its Skype property to a PE-led consortium.) Granted, it’s not uncommon for spending to dip in late summer, as even the hardest-working deal-makers look to kick back on the beach for a bit. But this year, it appears as if folks went ahead and remained on vacation. Speaking of which, we will not be publishing on Labor Day but will pick up again on Tuesday, the other side of summer.

PE group dials up Skype

Brenon Daly

Contact: Brenon Daly

Just a month after we speculated on an unconventional home for Skype Technologies, eBay found a rather unconventional home of its own for its VoIP subsidiary. Rather than go to Cisco, which is what we suggested as an (admittedly) far-flung idea, Skype has landed in a portfolio of a consortium led by tech buyout shop Silver Lake. Terms call for the group (Silver Lake, along with venture firms Index Ventures and Andreessen Horowitz, plus the Canada Pension Plan Investment Board) to hand over $2bn for two-thirds of Skype. EBay, which acquired Skype four years ago, will own the remaining one-third stake.

In most markets, a multibillion-dollar carve-out of a noncore asset led by a private equity (PE) firm would hardly be called ‘unconventional.’ (In fact, one could argue that type of transaction is precisely what PE firms should be doing.) But today’s market – even with the recovery that we’ve had – is hardly a healthy one. The equity markets have rallied, but investors – including the big investment groups that back the PE firms – are still skittish. Add to that, debt is still tough to come by. Those are the main reasons why buyout shops have been largely sitting on their hands recently, making a $2bn deal by a PE consortium a relatively unusual event.

Consider this fact: the Skype carve-out is the largest tech PE deal since May 2008. In fact, it accounts for almost half of all tech spending by buyout shops in 2009. So far this year, we’ve tallied 50 transactions that have an aggregate announced deal value of just $4.6bn. That’s one-third the amount during the same period last year ($13.1bn), and a mere fraction of the total the buyout barons spent during the same period in the boom year of 2007 ($101bn).

NICE Systems double-dips on deals

Brenon Daly

Contact: Brenon Daly

Less than three months after indicating that it was looking to step back into the M&A market, NICE Systems announced two deals back-to-back. The Israeli company reached for Hexagon System Engineering on Monday, and followed that up immediately with the much more substantial purchase of Fortent. Together, the transactions run NICE’s tally of acquisitions to a baker’s dozen since 2002.

Hexagon will add location-based services technology for cell phones to NICE’s portfolio. NICE will hand over $11m in cash for Hexagon, which we estimate was generating revenue in the low single digits of millions of dollars. As an aside on this deal, we would note that it marks the first time that NICE has shopped in its home market. (Although Actimize, NICE’s largest target, was founded in Israel and still does much of its R&D there, Actimize had moved its corporate headquarters to New York City several years before NICE picked it up.) In its other acquisitions, NICE has been a bit of a globetrotter, buying companies based in Australia, the Netherlands, Germany, the UK and the US.

Meanwhile, NICE (through its Actimize subsidiary) will pay $73.5m in cash for Fortent. We estimate that Fortent was running at about $30m in revenue, with most of that coming from sales of its anti-money-laundering (AML) product. Actimize competed with Fortent in the AML market, but also offers products for fraud detection and trading compliance. Actimize, which NICE acquired in July 2007 for $280m, has now inked three deals as part of NICE. The Actimize business, combined with Fortent, is expected to top $100m in revenue next year, roughly triple where it was when NICE bought it two years ago.

Will Taleo exercise its M&A option?

Brenon Daly

Contact: Brenon Daly

Having crossed the anniversary of its acquisition of Vurv Technology earlier this summer, Taleo recently indicated that it is looking to return to the M&A market. (Shares of the human capital management vendor trade essentially where they did when the company closed its $128m consolidation play with Vurv, while the Nasdaq is down about 12% over that same period.) Taleo’s pickup of Vurv was its largest-ever transaction, roughly doubling the number of customers for the company. The success that Taleo has enjoyed with migrating Vurv users to its own platform stands in sharp contrast to the other main consolidation play by a publicly traded rival, Kenexa’s $115m reach for BrassRing in 2006.

If we had to speculate on Taleo’s next M&A move, we suspect it would involve exercising a kind of ‘call option’ that it has on a startup. What do we mean by that? Last summer, when Taleo had its hands full with Vurv, it also made a $2.5m equity investment in a Redwood City, California-based startup called Worldwide Compensation (WWC). So rather than take on another acquisition immediately, Taleo smartly structured its investment – its only such investment – to give it right of first refusal to pick up all of WWC at any time through the end of 2009.

The investment in WWC comes with a partnership that adds WWC’s compensation management offering to Taleo’s core performance management products. In the second quarter, Taleo reported that it had three joint deals with WWC involving enterprise customers. As pay-for-performance offerings get more widely adopted, we could certainly imagine a case where Taleo would want to bring WWC in-house. In that regard, we might view the WWC investment as just a ‘try before you buy’ arrangement for Taleo.

Bleak outlook for social networking M&A

-Contact Thomas Rasmussen

In a sign of just how far the social networking market has fallen, brightsolid’s $42m purchase earlier this month of Friends Reunited from ITV Plc stands as the largest deal in the sector so far in 2009. The price is a mere 5% of the value of the largest social networking acquisition in 2008, which was AOL’s $850m all-cash pickup of Bebo. (We would also add that the sale of Friends Reunited netted ITV just one-fifth the amount it originally paid for the property in 2005.) On top of the notably smaller transactions, deal flow so far this year has been characterized by relatively paltry valuations. Friends Reunited garnered just 1.6 times trailing sales, compared to the estimated 42 times trailing revenue that Bebo got from AOL. Add all that together and it’s pretty clear that the bubble of social networking M&A has popped. In the space so far this year, we tally just 28 deals worth a total of $55.5m, compared to 53 transactions valued at more than $1.3bn in 2008.

As an aside, we would note that the acquisitions of Friends Reunited and Bebo have more in common than just ranking as the largest deals of their respective calendar years. The stalking horse bidder for Friends Reunited, Peter Dubens through his investment vehicle Oakley Capital Private Equity, has a close business relationship with Bebo founder Michael Birch. Dubens and Birch formed PROfounders Capital earlier this year under Dubens’ Oakley Capital umbrella. Oakley Capital reportedly offered to buy Friends Reunited for $25m, but declined to bump up its bid above even one times sales. Without reading too much into that, we might be tempted to conclude that except for Facebook, the little value that remains in most social networks is likely to only decline.

Red Hat rumors: a reheat or something more?

Brenon Daly

Contact: Brenon Daly

When VMware reached for SpringSource earlier this month, the $420m pairing represented the largest open source transaction in a year and a half. Now, the market is buzzing with rumors about another blockbuster open source deal, one that would be more than 10 times the size of VMware-SpringSource. Several sources have indicated that interest in Red Hat has been heating up lately, with Oracle and IBM popping up again as suitors.

The rumors, of course, are nothing new. We have been speculating about a possible pairing between Red Hat and IBM or Oracle for almost three years. (When Oracle launched its own support of Linux back in 2006, we wondered if it wasn’t a ‘beat ’em down and take ’em out’ strategy from the coldhearted Larry Ellison.) And when the rumblings surfaced again earlier this year, we did some back-of-the-envelope thinking about a bid from Oracle. Honestly, though, we think Big Blue is a more likely buyer for Red Hat.

While the speculation stays largely the same, however, there is one change: the price of Red Hat keeps going up. Since we noted the latest reports of Oracle’s interest in late March, shares of Red Hat have tacked on about one-quarter in value. The company currently sports a market capitalization of $4.2bn; however, its cash holdings lower the effective purchase price to about $3.5bn. Red Hat is just now wrapping its fiscal second quarter, and has already said it expects revenue to be about $179m for the period. The vendor will likely report results in about a month.