Category: technology stocks

IBM-Exeros: the wind-down and the bid-up

Brenon Daly

Contact: Brenon Daly

Even in the ongoing recession, the fundamental economic laws concerning supply and demand still haven’t been overturned. That’s at least one lesson we can draw from the recent sale of the assets of data discovery startup Exeros. Although terms weren’t disclosed, we believe IBM paid about $13m for Exeros. While that hardly seems like a blockbuster exit for a VC-backed startup that raised some $19m, we would note that the price is four times higher than the offer Exeros received from its first bidder.

As we understand the process, SAP offered just $3m for the assets. Exeros gambled and let the ‘no shop’ period expire on SAP’s bid and then successfully enticed IBM. (Big Blue will slot in the Exeros technology alongside a number of other tools in its Information Management portfolio.) One source added that IBM agreed to an earn-out that could take the final price up to $20m, potentially making Exeros’ backers whole on their investment.

Whatever IBM ends up handing over for Exeros, the target should probably consider any amount over SAP’s initial bid a windfall. The last time we spoke with Exeros (in mid-September, just before capitalism as we know it ended), the unprofitable startup said it was looking to raise a third round of funding that would carry it through to break-even status. Of course, we can all imagine how those fundraising conversations must have gone.

So instead of drawing down money, Exeros was wound down. However, the resulting transaction wasn’t like the dozens of scrap sales that we’ve seen in recent months, where a single buyer pushes the price down so low that the startup’s investors get just pennies on the dollar. With both SAP and IBM bidding, Exeros’ backers may well break even. And that’s not a bad return, given what they were facing.

That giant sucking sound on the US equity market

Brenon Daly

Contact: Brenon Daly

On the US equity markets Wednesday, it was one step forward, two steps back in terms of aggregate value of listed companies. As SolarWinds soared onto the NYSE, creating more than $800m of market value early in the day, Data Domain got picked up by storage rival NetApp. That deal, which is slated to close this summer, will erase some $1.75bn from the Nasdaq. That’s twice the amount added by SolarWinds.

Wednesday’s net outflow continues a long-running trend of a declining number of tech listings on the US public markets. Consider that since the last tech IPO (Rackspace’s offering on August 8, 2008), acquisitions of more than 50 US public companies have been announced. The total amount of market capitalization erased in those deals: $33bn. Considered another way, we would need 40 more SolarWinds-sized offerings to make up the deficit.

Just how far has the CDP market fallen?

Brenon Daly

by Brenon Daly, Henry Baltazar

In the days before the big storage vendors turned continuous data protection (CDP) into a feature rather than a stand-alone product, investors in CDP startups could still make decent returns. Both Kashya and Topio raised about $20m in VC backing, and ended up exiting for eight times that amount. Kashya sold to EMC for $153m in cash in May 2006 while Topio, which wisely blended CDP with heterogeneous replication in its offerings, went to NetApp for $160m in cash a half-year later. (Of the two deals, NetApp-Topio has been the underwhelming transaction. NetApp recently shuttered the SnapMirror for Open Systems product line that it picked up with Topio.)

Since those paydays, however, CDP valuations have plummeted. Symantec acquired assets of Revivio for an estimated $20m in November 2006, while Double-Take Software handed over just $8.3m for TimeSpring Software in late 2007. But even those deals seem rich when we consider BakBone Software’s recent reach for CDP startup Asempra Technologies. Under terms of the deal, BakBone is shelling out just $2.1m for Asempra, which had raised $36m from its backers. To add insult to injury, BakBone is paying for the acquisition mostly in equity, with $1.7m of the price tag covered by its illiquid, Pink Sheets-traded paper. We would note that Asempra’s owners are getting 3.8 million shares of BakBone, which typically only trade about 30,000 shares each session.

Select CDP transactions

Date Acquirer Target Price
May 2009 BakBone Software Asempra Technologies $2.1m
December 2007 Double-Take Software TimeSpring Software $8.3m
November 2006 Symantec Revivio $20m*
November 2006 NetApp Topio $160m
May 2006 EMC Kashya $153m
March 2006 Atempo Storactive Not disclosed

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

Buying back stock, rather than buying up companies

Brenon Daly

Contact: Brenon Daly

For a risk-averse company like IBM, it’s always preferable to buy a known than an unknown. At least that’s one way to read its decision to pass on taking home Sun Microsystems at any cost and instead put its money toward repurchasing a slug of its own equity. The recently announced $3bn buyback works out to just under half the amount that Big Blue was reported to have been ready to hand over for Sun.

That’s a fundamentally sound – if conservative – allocation of capital for IBM, a dividend-paying member of the Dow Jones Industrial Average. Nonetheless, it didn’t stop Sun’s winning suitor, Oracle, from tweaking Big Blue, saying it only got involved after IBM ‘failed’ to close the deal. For the record, we would note that since the ‘failure,’ IBM shares have moved higher while Oracle stock is essentially flat with where it was when the acquirer announced its bid. Of course, that verdict is based on just three weeks of trading.

IBM isn’t the only firm spending cash on its own shares rather than the equity of other vendors. Citrix, which hasn’t announced an acquisition in more than a half-year, recently said it plans to buy back some $300m of stock. Even when Citrix does do deals these days, they tend to be tiny purchases. Since acquiring XenSource in August 2007, Citrix has made just four small technology plays. We would chalk that up to the fact that Wall Street has been underwhelmed with Citrix’s purchase of XenSource, its largest-ever deal. And that doesn’t appear likely to change. At last week’s Synergy 2009 conference, Citrix barely mentioned M&A.

Will OpenTable’s IPO lead to M&A?

-Email Thomas Rasmussen

Just three months after filing its initial IPO paperwork, OpenTable set the terms of its $46m offering last week. At the high point of the $12-14 range for its shares, the company would sport a valuation just shy of $300m, or about 6x trailing 12-month (TTM) revenue and 50x TTM EBITDA. For the past three years, OpenTable has grown revenue at a compound annual rate of about 43%. Despite skepticism about the IPO market and OpenTable’s prospects during a period when its primary customers (restaurants) are struggling, the online restaurant reservations service should debut on the Nasdaq under the ticker ‘OPEN’ in the next week or two. OpenTable’s offering comes as Solarwinds is also slated to go public, after its prospectus aged for more than a year.

OpenTable has not disclosed how it will allocate the funds that it will raise in its offering. However, we believe it might be gearing up to make its first foray into M&A. One indication: the presence of Allen & Co as one of OpenTable’s four underwriters. Sure it had a hand in Google’s IPO, but Allen & Co is certainly known more as a media banker than a tech underwriter. OpenTable’s offering is being led by Merrill Lynch, with ThinkEquity and Stifel Nicolaus also on the ticket.

If OpenTable were to shop, we suspect it could well look to bolster its international operations. Since 2004, the San Francisco-based company has sunk millions of dollars into expanding outside the US, but has little to show for it. Its international business, which is burning money, accounts for just 5% of total sales. (The vendor recently pulled out of Germany and France.) We see a parallel between what OpenTable has run into in its unsuccessful international expansion and the early woes that its rich Web services cousin eBay experienced in trying to translate its business outside of its home market. After struggling to address foreign markets by just expanding its existing online auction service, eBay has been picking up local foreign sites that fit the nuances of business and culture in those markets. Ebay has spent billions of dollars lately buying its way into foreign markets.

Sun’s Sparc still has future, Ellison insists

Brenon Daly

Contact: John Abbott

With Oracle likely just two months or so away from closing its $7.4bn acquisition of Sun Microsystems, speculation is now picking up about what parts of Sun’s technology portfolio will be dropped. (And make no mistake, cost-cutting is a major driver of this deal. Oracle has pledged to wring at least $1.5bn of operating profit from Sun in the first year that it owns the company.) But Oracle is currently working hard to counter suggestions that it won’t take on Sun’s core hardware business, and in particular, that it will give up on Sparc processor development. That’s not the case, CEO Larry Ellison insists. In fact, Oracle will increase investment in Sparc, Ellison says.

His argument is that, by designing hardware and software together to work as a system, it’s possible to avoid the low-margin trap of the commodity server business. Sparc is a key part of that, says Ellison. He adds that, as IBM has found, some system features are best done in silicon. That said, Oracle doesn’t plan to work on a Sparc-Solaris version of its Exadata database machine. Instead, it will keep the arrangements it has with Hewlett-Packard in place over its current systems activities for the Exadata database machine, which Ellison claims has been the most successful product introduction in Oracle’s 30-year history.

However, it’s still hard to believe that Oracle will make a long-term commitment to the continuing development of a proprietary RISC chip architecture. IBM’s Power and Intel’s Itanium are now the only other significant architectures: Power has been bolstered by some lucrative and high-volume gaming console contracts, while Itanium sales, driven almost exclusively by HP, have done little more than replace shipments of older HP architectures (such as Alpha, PA-RISC and NonStop) without any significant market growth. So how does Ellison see his way out of this? He plans to work in partnership with Fujitsu to add features to Sparc aimed at improving Oracle’s database performance. But reading between the lines, it’s possible that this could lead to handing over most or all of the ongoing development work for Sparc chips to Fujitsu. Provided, of course, the Japanese tech giant wants to take that on.

SGI lives on, as Rackable closes deal and takes name

Brenon Daly

Contact: John Abbott

Rackable Systems has won approval from the bankruptcy courts to acquire Silicon Graphics Inc for $42.5m in cash, as other potential bidders passed on the one-time tech stalwart. And, just as Tera Computer did when it bought the much-better-known Cray in 2000, Rackable has opted to take on the Silicon Graphics name and branding. Rackable Systems becomes Silicon Graphics International, and the brand will be SGI. The Rackable name will survive only as a product moniker.

The higher price – the original offer was just $25m – now includes the equity of SGI’s international subsidiaries and federal systems businesses. The combined companies will have 5,000 customers and 1,350 employees worldwide, though the headcount is expected to shrink fairly rapidly to 1,250. The headquarters will stay in Rackable’s hometown of Fremont, California. Rackable’s current president and CEO Mark Barrenechea will hold the same roles and the board of directors will remain unchanged. However, some SGI executives will join the new management team, including Diane Gibson (senior VP of operations), Eng Lim Goh (senior VP and chief technical officer) and Robert Pette (VP of visualization).

Target customers are medium- and large-scale datacenters and high-performance computing (HPC) firms with Rackable’s x86 cluster compute systems, shared memory clusters, modular systems, storage products, data management software, HPC tools and visualization software. However, Rackable will have to work hard in the current economic climate. While sales were up slightly from the previous quarter, the company’s just-released first-quarter figures showed a year-over-year revenue decline of 34.5% to $44.3m and a loss of $13.4m.

What’s the return on Borland’s M&A?

Brenon Daly

Contact: Brenon Daly

Looking a bit closer at Micro Focus’ $75m acquisition earlier this week of Borland Software, my colleague John Abbott noted that the British company was essentially picking up the Segue Software business that Borland itself bought three years ago. Borland paid $100m, or an enterprise value (EV) of $86m, for the testing and quality assurance tools vendor, which worked out to about 2.3x EV/trailing 12-month (TTM) sales. The purchase of Segue in February 2006 came as part of a larger overhaul of its business, which included Borland ditching its developer tools division.

Fast-forward three years, and Segue is being valued by Micro Focus at just 80% of the amount that Borland paid for it. If we look at Borland’s overall EV of just $67m, the contrast is even starker. Micro Focus is paying a mere 0.7x EV/TTM sales for Borland, which is just one-third the multiple that Borland shelled out for Segue. This isn’t to pick on Borland or knock it for agreeing to sell itself for $1 per share, which is probably as good an outcome as it could have hoped for.

However, the valuation gap does highlight a larger problem in realizing value through M&A. Consider that since 2002, Borland – under various chief executives – has spent more than $300m on nearly a dozen deals. And yet, when all of the firm’s dealmaking was priced by another market participant (in this case, Micro Focus), the aggregate value was actually two-thirds lower. Granted, Borland was shopping in a different time than our current recession, which has obviously pushed valuations down these days. (And the valuation decline is nowhere near as drastic as we’ve seen elsewhere in the market, such as the bankruptcy of Nortel Networks, a company that was once worth more than $200bn.) Still, it’s always worth noting the price a company pays when it buys and the price it gets when it ultimately sells.

Select Borland acquisitions

Date Target Equity value
February 2006 Segue Software $100m
October 2002 TogetherSoft $185m
October 2002 Starbase $24m

Source: The 451 M&A KnowledgeBase

Comings and goings on US exchanges

Brenon Daly

Contact: Brenon Daly

The flurry of M&A announcements on Wednesday not only boosted trans-Atlantic shopping totals so far this year by nearly 20%, it also continued the trend of thinning the ranks of US public companies. The pair of Nasdaq-listed firms that got erased on Wednesday (Borland and Vignette) brings the number of acquisition announcements of US public tech companies to some 22 so far this year.

To be clear, that sum is made up of deal announcements, not closed transactions. So it includes offers that have been rejected by the would-be target (Emulex) as well as bids where the terms are still in play (SumTotal Systems). Against that, we have had only a minimal ‘repopulation’ of the US exchanges. Just three tech companies – none of which is a true IT vendor – have gone public this year. That’s about to change with SolarWinds, which is expected to hit the market in a week or two. (And on the consumer Internet side, OpenTable set the terms of its planned IPO on Thursday.)

We would also note that Wednesday’s ‘twofer’ of Borland and Vignette is actually the third time in the past month that two deals for US public companies have been announced in a single day. The other days: April 20, with Oracle-Sun Microsystems and Trilogy-Autobytel, and April 13, with Thoma Bravo’s bid for Entrust and Image Holdings’ reach for InFocus. In terms of banking, JP Morgan Securities did the double Wednesday, advising both Borland and Vignette on their sales to Micro Focus and Open Text, respectively. But the bank is doing its part to add back public companies, leading the SolarWinds offering.

Trans-Atlantic transactions take off

Brenon Daly

Contact: Brenon Daly

It was a big and busy day on Wednesday for British companies shopping in the country’s former colony across the Atlantic. Collectively, the three deals boosted the total disclosed value of acquisitions by UK-based firms so far this year by nearly 20%. For starters, LSE-traded software vendor Micro Focus picked up one full Nasdaq-listed company and bits of another US public company, spending a total of about $155m. Taken together, the simultaneously announced deals are the second-largest transaction announced in 2009 by a UK-based buyer. Adding to that, British defense giant QinetiQ reached for a well-funded security startup in a deal that features a handsome valuation and a pretty rich possible earn out.

In the more significant purchase, Micro Focus picked up long-ailing Borland Software for $1 per share, or an equity value of about $75m. In the same breath, it also scored a business line from Compuware for $80m. Micro Focus says the addition of Compuware’s application testing/automated software quality (ASQ) unit will help bolster its existing ASQ offering, a suite of tools that it sells under the Data Express name.

One of the more interesting aspects of Micro Focus’ double-up deal is that the company tapped Arma Partners to run both processes. (The transaction was headed up by Arma’s Paul-Noël Guély, along with Keith Robinson, Varun Sunderraman and Graham Smith.) Arma has served as a kind of house bank for Micro Focus, advising on four of the company’s past five deals. On the other side of the table, Updata Advisors worked with Compuware on its divestiture and JP Morgan Securities advised Borland. We’ll have a full report on the moves by Micro Focus in Thursday’s 451 Group sendout.

In a separate transaction, QinetiQ (through its North American arm) moved deeper into the cyber-intelligence world by buying Cyveillance. Terms call for QinetiQ to hand over $40m upfront, along with a possible $40m earn out over the next two years. Cyveillance, which we understand didn’t use a banker, generated sales of about $10m in 2008. Look for a full report on the relatively richly valued transaction in tonight’s 451 Group MIS email.