Category: technology stocks

Advisors in EMC-Data Domain: a chorus and a solo

Brenon Daly

Contact: Brenon Daly

It’s often said that there are three types of falsehoods: lies, damn lies and statistics. To that list, we might be tempted to add a fourth category: league tables. That’s in the front of our minds because we just put together our mid-2009 update to the rankings of the busiest tech banks. (For those curious, Credit Suisse Securities took the top honor, with more deals and more dollars advised than any other bank. Banc of America Securities and JP Morgan Securities rounded out the podium.)

To be clear, we’re not saying that banks make up deal credits. Instead, we’re just noting that the credits, like statistics, may be more malleable than most people think. As we tally the transactions to come up with our rankings, there are invariably deals that smack of a little gamesmanship. In this case, it’s the chorus of advisers for EMC in the storage giant’s purchase of Data Domain. No fewer than eight banks – ranging from bulge brackets to a high-end boutique to even a midmarket firm – are all claiming credit for EMC. (We confirmed, indirectly, with EMC that each of the banks did indeed play a role in the acquisition.)

Meanwhile, on the other side, boutique advisory firm Qatalyst Group took sole credit for working the sell-side for Data Domain. Some observers initially dinged Frank Quattrone’s shop for running such a narrow process. (We understand, for instance, that EMC didn’t see the initial book on Data Domain when NetApp was preparing its bid.) Whether that’s the case or not is largely academic at this point, since the transaction closed a week ago. And it’s largely irrelevant, given where the deal was ultimately done. Data Domain enjoyed the richest price-to-revenue multiple in the sale of a US public company since March 2008.

UPDATE: After initially publishing this piece, Bank of America Merrill Lynch reached out to us to say that they, too, should have a deal credit for advising EMC. For those of you keeping score at home, that brings the total number of advisors for EMC, which was working to land Data Domain for all of two months, to nine separate banks.

Credit Suisse tops mid-2009 league table

Brenon Daly

Contact: Brenon Daly

In the midyear update to our league table, Credit Suisse Securities has emerged as the busiest adviser in tech M&A for the first two quarters of 2009. It was a dramatic rebound for Credit Suisse, which fell out of the top 10 in 2008 after ranking third in 2007. The bank owes much of its standing to its role in helping to sell Sun Microsystems to Oracle, which was the tech industry’s largest deal since mid-2008. (Our league table is based on acquisitions of US-based IT businesses that were announced – but not necessarily closed – in the first half of the year.)

But it wasn’t just the one whopper deal that put Credit Suisse on top. In fact, the bank not only advised on the highest amount of tech M&A spending ($10.4bn), it also advised on the largest number of transactions (10). That’s even more noteworthy since Credit Suisse did not participate in the wave of consolidation that has swept through investment banking over the past year. The next two firms in our rankings both bolstered their tech banking practices by doing some M&A of their own.

Banc of America Securities, which ranked second on our midyear league table, has enjoyed a significant boost in its tech advisory business since it closed its purchase of Merrill Lynch on January 1. The combined entity advised on six deals worth some $8.3bn so far this year. Just behind Banc of America is JP Morgan Securities, which added Bear Stearns in a distressed sale in mid-2008. JP Morgan ranked third, with five deals valued at $8bn. We will have the full standings and analysis on the midyear league table in a special report that will be included in tonight’s Daily 451 sendout.

League table standings, midyear 2009

Bank Number of deals Amount of spending
Credit Suisse Securities 10 $10.4bn
Banc of America Securities 6 $8.3bn
JP Morgan Securities 5 $8bn

Source: The 451 M&A KnowledgeBase

IBM’s ‘Tuesday twofer’ still leaves it behind most years

Brenon Daly

Contact: Brenon Daly

In a highly unusual move, IBM did the M&A equivalent of a ‘Tuesday twofer,’ buying both big and small yesterday. In terms of the high-dollar deal, Big Blue said it will hand over nearly $1.17bn in cash for predictive analytics software vendor SPSS. The purchase of SPSS is the company’s largest transaction since it shelled out $5bn for Cognos in November 2007. In fact, we suspect the $1.17bn paid for SPSS is roughly the same amount that IBM spent on the nine deals it has announced (many of them with prices undisclosed) since picking up Cognos.

On the smaller side, IBM also said yesterday that it has acquired startup Ounce Labs, which makes source code analysis software. Terms weren’t revealed, but we wouldn’t be surprised to learn that the amount IBM paid for Ounce Labs was just 1% of the price it forked over for SPSS. Ounce Labs had raised some $29.5m in venture backing.

As a final thought on Big Blue’s doubleheader yesterday, we would note that the two purchases double the number of acquisitions that IBM has announced so far this year. The total of four deals in 2009, however, is basically half the number it had announced by this time in any of the previous three years.

Turning down the trade sale

Brenon Daly

Contact: Brenon Daly

Since the Wall Street crisis erupted last fall, the M&A advice most companies have gotten has been not to sell unless they absolutely have to. That sentiment has quieted overall dealmaking activity, as well as pressured valuations across the board. It turns out that not even promising startups could escape the malaise. Later this afternoon, Tim Miller, our head of financial markets, will present our findings on the status of the AlwaysOn Global 250 to the seventh annual Summit at Stanford University. One key finding about the AO 250 startups: only 12 companies sold in the year since the previous conference, which is just half the number in each of the three previous years. Tech giants that have picked up AO 250 startups since the last conference include CA Inc, Omniture, Nokia and Hewlett-Packard.

While the number of trade sales declined notably for AO 250 companies, there was a significant pickup in the other exit option, an IPO. Three AO 250 companies managed to make it to the public markets over the past year, creating an aggregate market valuation of some $2.5bn. Those offerings came despite talk about the IPO window being closed. Further, all of them are trading above their issue price even though the broader market has been rather inhospitable lately. The Summit at Stanford opens Tuesday and runs through Thursday afternoon. For more details on the conference, see the event page.

Quiet close to Micro Focus-Borland after noisy process

Brenon Daly

Contact: Brenon Daly

After more than two months of back-and-forth negotiations, Micro Focus is set to take home Borland Software. Shareholders in Borland approved the $113m deal on Wednesday and Micro Focus shareholders signed off on it on Friday. Originally announced on May 6, the acquisition is set to close early next week. Along the way, Micro Focus had to pay 50% more than it originally bid, but still picks up the application lifecycle management vendor for just 1 times its sales.

The reason Micro Focus had to reach deeper into its coffers is that after the parties initially agreed to the transaction, at least two other shoppers popped up with offers of their own. Or more accurately, the would-be buyers indicated that they were interested in bidding. We already noted our suspicion that one of the pair was the recently launched 2SV Capital, although the firm didn’t pursue the nonbinding bid beyond an initial query.

As for the identity of the other suitor, which was identified only as Company A in US Securities and Exchange Commission filings, it turns out we were off with our guess of Embarcadero Technologies. In fact, we were off by about 3,000 miles. A source indicated that the mystery bidder was in fact Allen Systems Group, which has its headquarters in Naples, Florida. The privately held company has done some 30 acquisitions over the two decades it has been in business. We understand that the firm may have had trouble lining up the financing to top Micro Focus’ offer for Borland, which has an enterprise value of $164m. Allen Systems didn’t return several messages seeking comment.

With Data Domain done, what’s next for NetApp?

Brenon Daly

Contact: Brenon Daly, Simon Robinson

Data Domain was originally slated to report second-quarter earnings later this afternoon. Instead, the data de-duplication specialist is done as as an independent company, with the acquisition by EMC for the princely sum of $2.3bn closing today. The deal looks even ‘princelier’ when we consider the markdown M&A that we’ve been seeing recently. In fact, EMC’s bid values Data Domain at 7.4 times its trailing 12-month (TTM) revenue. That’s the richest multiple paid for a US public company since March 2008, when Ansys paid 8.2 times TTM sales for Ansoft.

Assuming the deal does indeed go through as expected, we wonder what will happen with the vendor that originally put Data Domain in play, NetApp. Certainly, the proposed pairing, which was approved by the boards at both firms, would have been a boost for NetApp. The storage system giant could certainly benefit from a midrange de-dupe product to serve customers beyond its existing base, which is precisely what Data Domain would have provided. The head of our storage practice, Simon Robinson, recently speculated that NetApp may well target other de-dupe providers. None of the potential candidates appears to fit as cleanly into NetApp as Data Domain would have, but there are nonetheless cases to be made for both CommVault and ExaGrid Systems.

While CommVault does indeed offer de-dupe technology, its backup software would pose a tricky integration challenge for NetApp, which sells appliances as an alternative to traditional backup software. (Keep in mind, too, that NetApp’s M&A track record hardly inspires confidence.) Meanwhile, ExaGrid is a company that in many ways has shaped itself in the image of Data Domain, albeit while selling de-dupe appliances. Buying ExaGrid wouldn’t bring NetApp the same heft as picking up Data Domain, but it would fit nicely into its focus on the SME market. If nothing else, NetApp could put some of the windfall of the $57m breakup fee that it received from the Data Domain deal toward another de-dupe move.

Adknowledge inks super deal for social advertising dominance

-Contact Thomas Rasmussen

Rumors of the sale of Super Rewards (also known as SR Points) have been swirling for quite some time. On Wednesday, acquisitive Adknowledge announced that it is indeed the winning bidder in a competitive sales process for Vancouver-based Super Rewards, a bootstrapped, 40-person incentives-based online advertising startup. (We understand that Super Rewards is profitable and generating approximately $60m in gross revenue – a number the firm says could hit as much as $100m this year. Of course, the company’s net revenue is much lower, likely in the neighborhood of one-fourth the gross amount after revenue share.) The purchase of Super Rewards marks the sixth acquisition for Adknowledge in less than two years, and we estimate this transaction is by far its largest yet. The deal also marks a shift in the M&A strategy of the Kansas City, Missouri-based online advertising giant, which has typically been more inclined to pick up heavily discounted distressed assets.

Nonetheless, Adknowledge, which we estimate was running profitably on close to $200m in revenue prior to the acquisition, has made a smart purchase in reaching for Super Rewards. Incentives-based advertising companies like Super Rewards have received quite a bit of attention recently because they seem to have found a way to actually make money off of social networks. (The fundamental business principle of profitability has largely eluded the social networks themselves.) Much like other online advertising niches, it is a sector that stands as a small, faster-growing piece of a much larger overall market. But in order to reach their full potential, incentives-based advertising vendors need the scale brought by established and wealthy companies like Adknowledge, which boasts more than 50,0000 advertisers. Because of that, we weren’t surprised to see Super Rewards gobbled up – and we wonder if the same thing might not end up happening to the firm’s two main rivals.

We’re thinking specifically about Fremont, California-based Offerpal Media and San Francisco-based Peanut Labs, which have taken approximately $20m and $4m in venture capital, respectively. The largest independent startup remaining in the niche sector, Offerpal Media recently said it was doing around $40m in revenue. Potential acquirers include dominant online advertising players such as Microsoft, Google, Time Warner’s AOL and ValueClick. In particular, we suspect ValueClick could be ready to shop as a way to stand out from its larger competitors. The Westlake Village, California-based company certainly has the means to do a deal, since it has no debt and some $100m in cash. Other potential suitors for incentives-based advertising startups include large-scale application platforms such as Facebook and NewsCorp’s MySpace that would benefit greatly from bringing the ad service in-house.

Adknowledge M&A

Date announced Target
July 22, 2009 KITN Media [dba Super Rewards]
March 12, 2009 Miva Media
November 6, 2008 Lookery (Advertising business assets)
November 3, 2008 Adonomics [fka Appaholic]
December 6, 2007 Cubics Social Network Advertising
November 8, 2007 Mediarun (UK and Australia divisions)

Source: The 451 M&A KnowledgeBase

A happy anniversary for Brocade-Foundry

Brenon Daly

Contact: Brenon Daly

As far as Wall Street is concerned, nothing has really happened to Brocade Communications over the past year. Shares in the storage and networking vendor trade exactly where they did this time last July. And yet, there have been monumental changes at the company during that time. Exactly a year ago today, Brocade announced its largest and riskiest deal: the $3bn purchase of Foundry Networks. The transaction faced a number of challenges, both in terms of strategy and execution. And compounding those difficulties was the fact that Brocade would be closing the acquisition during the most severe economic slowdown since the Great Depression.

For starters, Brocade was planning to borrow some $1.4bn of the $3bn purchase price. In normal times, that wouldn’t be a problem for a cash-producer like Brocade. But with the credit markets frozen last fall and people wondering about the economic outlook, borrowing seemed unlikely. (The uncertainty around the economy led the two sides to trim the final purchase price to just $2.6bn in late October; the transaction closed in mid-December.) Beyond the question of financing the pickup, folks questioned the wisdom of a deal that would move the combined company even more directly into competition with Cisco Systems, the most successful networking vendor of the modern era.

That thought certainly spooked investors. As soon as the pairing was announced, Wall Street knocked some 20% off Brocade shares and continued to put pressure on them well into this year. At their lows in early March, Brocade shares had lost some three-quarters of their value since the announcement of the acquisition. (That compares to a 40% decline in the Nasdaq during the same period.) The slide left Brocade in the absurd situation of sporting a market capitalization of just over $800m, despite tracking to generate about $1.9bn in sales in the current fiscal year. It was also a rather damning assessment of the Foundry buy, given that Wall Street was valuing the combined Brocade-Foundry entity at just one-third the amount that Brocade had valued Foundry.

It turns out that the market dramatically undervalued Brocade. Since bottoming out, its shares have quadrupled, giving the vendor a current market capitalization of $3.4bn. That run has left Brocade shares flat over the past year, while the Nasdaq is down some 18% during that time. Brocade has also slightly outperformed rival Cisco over the past year.

Wall Street seems to be digesting the fact that Brocade may actually be able to survive – even thrive – in its fight with Cisco. (For its part, Cisco hasn’t been helping its own cause. Recent actions, including introducing a new server offering, have created more enemies than friends.) Meanwhile, Brocade has integrated Foundry a quarter or two earlier than planned and has been pitching itself as a viable alternative to the giant. Despite a tough beginning, that message is starting to resonate with customers.

MathStar saga gets ‘curiouser and curiouser’

Brenon Daly

-Contact Brenon Daly

As the tender offer for MathStar runs into its final hours ahead of this evening’s expiration, there’s a new twist in the already-twisted saga around this Pink Sheets-listed company. First, a bit of a recap. In early June, hedge fund Tiberius Capital tossed out an unsolicited bid of $1.15 for each share of MathStar, which has been exploring ‘strategic alternatives’ for more than a year. MathStar’s board rejected the initial overture, as it did when Tiberius sweetened the offer earlier this month to $1.25 per share, for a total of $11.5m. When it bumped the bid, Tiberius also said the tender offer expires late tonight. (Of course, it could extend the deadline, as often happens in these cases.)

At this point, however, the deal gets ‘curiouser and curiouser’ (as Alice said when she found herself in Wonderland). We noted late last week that rather than be a seller, MathStar is now planning to be a buyer. The erstwhile fabless semiconductor firm announced that it plans to acquire language-translation vendor Sajan. As expected, the news didn’t go over well with Tiberius, which is also MathStar’s largest shareholder. But the planned purchase also didn’t sit well with the company’s founder and longtime chief executive, Douglas Pihl, who quit in protest.

Given such a vote of no confidence, we looked more closely into MathStar’s proposed buy of Sajan. Although investment bank Craig-Hallum Capital Group is listed as the adviser for MathStar on the deal, we discovered that the transaction actually flows through a different Minneapolis-based investment bank, Feltl and Company.

Not disclosed anywhere publicly is the fact that Feltl has actually worked on deals for both sides of the proposed acquisition, serving as manager for two MathStar offerings over the past three years, and having done placements for the firm before that. Feltl also advised on a placement for Sajan in January 2007. We’re not suggesting anything nefarious about the proposed MathStar-Sajan transaction. But we sought to clarify how it came to be that a vendor with a decade of business in the semiconductor industry came up with the idea – along with Feltl as well as its lawyers and bankers – to use half of its cash holdings to buy its way into a completely different field. No one returned calls.

Software AG looks for a repeat

Brenon Daly

Contact: Brenon Daly, Dennis Callaghan

Having significantly whittled down the debt it picked up acquiring webMethods two years ago, Software AG is now ready to add on a bit more to cover its pending purchase of IDS Scheer. It plans to borrow some $470m and pay that back over the next three years or so. With Software AG’s steady cash generation, that shouldn’t be a problem. (The German company, which also pays a dividend, says it is on track to accumulate some $190m in free cash flow this year.)

In fact, we understand that capital questions hardly figured into the firm’s M&A plans, which it had trumpeted for the better part of two years. Instead, Software AG has simply been waiting for prices to come down. And based on the fact that it paid less than half the valuation for IDS Scheer than it handed over for webMethods, we’d say its patience paid off. (Additionally, it is about half the valuation that IBM paid for ILOG, which boosted Big Blue’s business process management portfolio.)

As a final thought on this week’s transaction, we suspect that if Software AG gets half the return on IDS Scheer that it got on webMethods, it’ll probably be pretty pleased with its new purchase. (Arma Partners advised Software AG on both deals.) WebMethods is now the vendor’s second-largest revenue producer. Moreover, the webMethods business expanded 33% in 2008 – twice the rate of overall revenue growth at Software AG last year.