Category: technology stocks

Gaming for consolidation

-Contact Thomas Rasmussen

Once considered largely recession-proof, the videogame industry continued its breakdown last week. As part of the ongoing fallout, UK-based Eidos Interactive was picked up for a bargain last Thursday on the same day that Chicago-based Midway Games filed for Chapter 11 bankruptcy. Eidos was acquired for $124.4m by Japan’s Square Enix, which, while successful on its home turf, has long desired a larger global presence. We would note that the purchase by Square Enix was the 11th gaming acquisition so far this year – more than twice the number during the same period in both 2008 and 2007. And with falling valuations and desperate investors deep underwater, we have a feeling that we will see more consolidation soon, with large players involved.

One such major acquirer that has not been coy about its M&A intentions is Disney. The entertainment behemoth has been making large inroads in gaming partly through acquisitions, and on a recent conference call addressing its future in gaming, the company said that attractive strategic acquisitions could be in the cards this year. So what might Disney buy? Longtime partner THQ, which has been responsible for the majority of Disney-themed games over the years, is a likely candidate. The Agoura Hills, California-based company has struggled over the past year, watching its market capitalization plunge more than 90% from its 52-week high to just $180m.

But a more interesting – and game-changing – scenario is Disney’s possible pickup of Electronic Arts (EA). The once-soaring company, which used to be an extremely active acquirer itself, could be ripe for the taking. EA’s current market cap is around $5.2bn, down from a 52-week high of $20bn. Disney currently has almost $4bn in cash and a market cap of $33bn. It clearly has the means, and let’s not forget that this is the same company and the same management that spent $7.4bn three years ago to acquire Pixar and cement an overnight leadership in computer animation. We estimate that EA could be had for slightly more than what Disney paid for Steve Jobs’ baby, representing a 50% premium over its current value.

Buyout barons go big, then go home

Brenon Daly

Contact: Brenon Daly

After totaling about $100bn in both 2006 and 2007, the aggregate value of acquisitions by private equity (PE) firms dropped to $27bn last year. And the way 2009 is starting out, we’re certainly looking at another down year for leveraged buyouts (LBOs). So far this year, we’ve seen just half the number of financial deals that we saw during the same period in each of the past two years, and spending has plummeted. The largest LBO so far this year is a mere $60m.

Obviously, the dealmaking climate has changed dramatically over the past three years for the buyout barons, who were once able to draw enough cheap credit to pay top dollar for some technology properties. On occasion, PE firms were able to outbid strategic buyers for companies, even though corporate buyers should be able to wring out more cost savings not available to buyout shops, which (theoretically) should allow them to pay more.

To get a sense of just how far valuations have plunged, compare the price that Chicago-based PE shop Madison Dearborn Partners paid for CDW in May 2007 with the current valuations of VARs that are still publicly traded. (We were thinking about that last week because Insight Enterprises lost half of its value when it said it would have to restate earnings going back a decade.) In its $7.3bn buyout, CDW went private at 1x trailing 12-month (TTM) sales and about 15x TTM EBITDA. In contrast, both Insight and PC Mall currently trade at just one-tenth the price-to-TTM-sales multiple (0.08x sales for both companies) and about one-fifth the price-to-TTM-EBITDA multiple (2.3x for Insight and 3.2x for PC Mall.)

PE deal flow

Period Deal volume Deal value
January 1 – February 17, 2009 20 $149m
January 1 – February 17, 2008 36 $879m
January 1 – February 17, 2007 44 $9.8bn

Source: The 451 M&A KnowledgeBase

Cisco: not a common-sense shopper

Brenon Daly

Contact: Brenon Daly

Through both direct and indirect cues, Cisco Systems’ John Chambers has created the impression that he’s about set to start wheeling a shopping cart up and down the Valley, grabbing technology companies with abandon. Folks who anticipate a dramatic return of Cisco to the M&A market have been busy putting together a shopping list for the company. (As has been well reported, the networking giant has plenty of pocket money; it current holds some $29bn of cash, and just raised another $4bn by selling bonds.) Most of the names on the list are ones that have been kicked around for some time.

For instance, fast-growing Riverbed Technology tops the list for some people. Indeed, Chambers approached the WAN traffic optimizer at least twice before the company went public in 2006, according to a source. We understand that talks ended with Riverbed feeling rather disenchanted with the giant. Other speculation centers on Cisco making a large virtualization play, either reaching for Citrix or VMware. The thinking on the latter is that Cisco would actually buy EMC, which sports an enterprise value of $21bn, to get its hands on the virtualization subsidiary. And last year we added another name to the mix, reporting that Cisco may have eyes for security vendor McAfee.

There’s a certain amount of logic to all of the potential acquisition candidates. At the least, speculation about them is defensible since they are all rooted in common sense. The only hook is that Cisco isn’t a ‘common-sense’ shopper. That’s not to say it isn’t an effective acquirer. Cisco very much is a smart shopper, and we’d put its recent record up there with any other tech company. What we mean is that Cisco’s deals are anything but predictable.

For instance, Cisco was selling exclusively to enterprises when it did an about-face nearly six years ago and shelled out $500m in stock for home networking equipment vendor Linksys. And it got further into the home when it followed that up with its largest post-Bubble purchase, the late-2005 acquisition of Scientific-Atlanta for $6.9bn. (Although word of the deal for the set-top box maker leaked out, few people would have initially put the two companies together.) Similarly, WebEx Communications wasn’t on any of the Cisco shortlists that we saw before the company pulled the trigger on its $3.2bn purchase of the Web conferencing vendor. But what do we know? Maybe some folks out there not only called one or two of those deals, but also hit the unlikely trifecta. If so, maybe you could email us to let us know – and while you’re at it, could you pass along some numbers for lottery picks?

Informatica: Wheeling and dealing in the Windy City

Brenon Daly

Contact: Brenon Daly

It appears that the Second City is a first stop for M&A at Informatica. The data integration company picked up Chicago-based startup Applimation for $40m on Thursday. And there’s continuing speculation that Redwood City, California-based Informatica will reach for the Windy City’s Initiate Systems for a master data management platform. So, in addition to being (in the words of Carl Sandburg) the ‘Hog Butcher for the World/ Tool Maker, Stacker of Wheat/[and]… City of the Big Shoulders,’ Chicago is emerging as a bit of a data dealer.

Of course, there’s another Chicago connection to a possible Informatica deal, one that has the company on the sell side. We have speculated in the past that Oracle might make a play for Informatica to shore up its data quality and data integration business. How does the city figure into that rumored pairing?

As has often been recounted, Oracle CEO Larry Ellison was raised by his adoptive parents on the hardscrabble South Side and very briefly attended the University of Chicago. Shortly after dropping out and founding the company that would eventually go on to become Oracle, one of Ellison’s first hires at the fledgling firm was a young programmer, who had studied at the University of Illinois, for the Chicago office. The person hired was Sohaib Abbasi, who spent 20 years at the database giant before leaving to head up Informatica.

Seven down, five to go for VeriSign

-Contact Thomas Rasmussen

After accounting for a dime of every dollar spent on M&A in 2008, divestitures appear likely to be a thriving business again in 2009. They accounted for 11% of the total M&A spending last year, up from 7% in 2007. And respondents to our annual Corpdev Outlook Survey said they were twice as likely to expect the pace of divestitures to increase than decrease this year. This is especially true for larger companies, some of which have overindulged on M&A throughout the years.

In the world of tech divestitures, there is no better example of this than VeriSign. The naming and encryption giant has been working toward selling off billions of dollars worth of properties that ousted CEO Stratton Sclavos picked up during his multiyear shopping spree. The company announced its first divestiture of 2009 last week, the sale of its European messaging division 3united mobile Solutions. That move follows the sale of its remaining stake in Jamba in October 2008 and the divestiture of its inCode communications and post-pay billing divisions in November and December, respectively.

For those of you keeping score, VeriSign has now completed seven deals, with five still to go. But as is becoming grudgingly apparent to the company and many others in the same position, this is easier said than done. The current economic environment is not exactly ideal for divestitures or spinoffs. And shedding the remaining parts, especially its bloated communications and messaging divisions, has proven to be quite a challenge for the company since they most likely command a much higher price tag, likely in the hundreds of millions of dollars. VeriSign says there are strategic buyers, but the closed credit market and general economic anxiety are severely hampering potential deals.

A chronicle of VeriSign’s seven divestitures

Date Acquirer Unit Note
February 2009 Sinon Invest Holding 3united Mobile Solutions Acquired for $66m in 2006
December 2008 Convergys Post-pay billing business
November 2008 Management buyout inCode Wireless Acquired for $52m in 2006
May 2008 MK Capital Kontiki Acquired for $58m in 2006
April 2008 Melbourne IT Digital Brand Management Services business Sold for $50m
April 2008 Globys Self-care and analytics business
June 2007 Sedo.com GreatDomains.com business

Source: The 451 M&A KnowledgeBase

AVX looking to buy again

Brenon Daly

Contact: Brenon Daly

A year and a half after inking the largest deal in its history, electronic components maker AVX is mulling a return to the market. CEO John Gilbertson told investors at the Thomas Weisel Partners Technology Conference on Monday that he’s considering acquisitions that would bolster the company’s specialty business, including defense, medical or aerospace. Gilbertson added that any deal would be small, likely in the range of $30-50m.

The CEO also said he wouldn’t be paying anywhere close to the multiple he paid in AVX’s largest deal, the $231m all-cash purchase of American Technical Ceramics (ATC) in June 2007. In that transaction, AVX paid 2.6x trailing 12-month revenue for ATC, in part because it had to outbid at least three other parties. (Thomas Weisel banked ATC.)

Since announcing that acquisition, shares of AVX – a dividend-paying company that is majority owned by Kyocera – have lost 40% of their value. The company currently has no debt, with $527m in cash and equivalents, and sports an enterprise value of about $1bn. That’s just 0.6x the $1.6bn in sales that AVX recorded in 2008. Gilbertson said that’s more the valuation he’d expect to pay in any deal he’d do these days.

The saga of Certicom’s sale

Brenon Daly

Contact:  Brenon Daly

After more than two months of bid and counterbid, the saga of the sale of Certicom appears to be nearing its close. In early December, fellow Canadian tech company Research in Motion tossed out a low-ball bid of $1.21 for each of the 43.7 million shares of Certicom. Overall, that valued the cryptography vendor at some $53m. We should hasten to add that RIM’s offer was unsolicited.

Certicom, along with adviser TD Securities, mulled over the offer for about three weeks before saying ‘thanks but no thanks’ to RIM. Undeterred, RIM kept its bid alive for the next month, before officially pulling it January 20. Three days after that, VeriSign stepped in with an offer of $1.67 for each Certicom share, or a total of $73m.

Just last week, RIM reentered the picture with a bid of $2.44 per share, or about $106m. (Viewed another way, RIM’s new offer values Certicom at exactly twice the level as its initial bid.) As part of the terms, VeriSign now has until Wednesday to up its offer or see Certicom go to RIM. (The deal carries a $4m breakup fee.)

Of course, there could always be a third suitor in the picture. If we had to pick one likely candidate, we might tap IBM. Last April, Big Blue inked a ‘multiyear, multimillion-dollar’ license agreement with Certicom, and has already handed over a $2m upfront payment.

How do you say ‘please come back’ in Korean?

-Contact Thomas Rasmussen

When SanDisk released its dismal earnings this week, dismayed shareholders hastily headed for the hills. The exodus caused SanDisk’s stock to plunge 25%. In the fourth quarter of 2008, the flash memory giant lost $1.6bn, pushing its total loss for the year to $2bn. This red ink from operations was exacerbated by the company’s $1bn of acquisition-related write-downs stemming from its $1.5bn acquisition of msystems in July 2006. In the days following the dire news, SanDisk has been trading at a valuation of around $2.2bn. That’s a far cry from the $5.6bn that Samsung offered for SanDisk in September.

To put the decline in perspective, SanDisk’s three largest outside shareholders – Clearbridge Advisors, Capital International Asset Management and Capital Guardian Trust, which collectively own more than 15% of SanDisk (as of September 30) – suffered a paper loss of more than $700m since the day Samsung walked away from the proposed deal. Given this, we wouldn’t be surprised if shareholder ire forced SanDisk to reconsider its strategic options this year. On its earnings call this past Monday, the company reiterated that its board is indeed open to deal with any interested parties, which begs the inevitable question: Who might be willing buyers?

With private equity largely stymied and longtime partner Toshiba repeatedly stating that it’s not interested in a deal, Samsung is still the most logical fit. It has the cash, has shown a willingness to pay a solid premium, and would integrate well with SanDisk’s overall portfolio of products. In addition to its valuable intellectual property assets (which would eliminate those ugly royalty fees) and flash and solid-state drive lineup, SanDisk would instantly give Samsung the second-largest share of the music player market, behind only Apple. Perhaps it’s time for SanDisk CEO Eli Harari to brush up on his Korean, or at least learn how to say ‘please come back’ in that language.

Divestitures and deal flow

Brenon Daly

Contact: Brenon Daly

Qualcomm’s recent pickup of graphics and multimedia assets cast off by Advanced Micro Devices continued a trend toward divestitures by major technology companies. Nokia, Verisign, Rackable Systems and Symantec, among others, all sold parts of their business in 2008. And, more specific to the chip industry, AMD’s rival Intel has done more selling than buying over the past three years. (For the record, AMD sold technology to Qualcomm that the wireless company had licensed for several years. Qualcomm will hand over $65m for the unit.)

We expect that more companies will look to sell off segments in 2009, as Wall Street increases the pressure on them to focus on their core business. (We have noted in the past that Symantec, which will have a change at the chief executive spot in April, is a prime candidate for further divestitures.) In 2008, spending on divested business units accounted for some 11% of all M&A activity. That’s up from just 7% in 2007. We wouldn’t be surprised at all to see divestiture spending remain in the double digits in 2009.

A 2007 deal done in 2009

Brenon Daly

Contact: Brenon Daly

In many ways, Autonomy Corp’s surprise purchase of Interwoven looked more like a 2007 deal than any transaction of a more recent vintage. In fact, both the purchase and the valuation line up almost exactly with acquisitions of public companies in 2007. Specifically, Interwoven’s enterprise value (EV) of $704m matches almost exactly the median EV of $701m for companies acquired in 2007. And Autonomy’s purchase values the content management vendor at 2.8x its trailing 12-month (TTM) sales, compared to 2.6x TTM sales for deals in 2007.

The Autonomy-Interwoven transaction stands out even more coming off of 2008, when public company deals took a hammering. The median EV/TTM sales multiple got cut nearly in half last year, falling to 1.4x from 2.6x in 2007. Meanwhile, the median purchase price sank to $159m from $701m.

Public company M&A

Year Median deal size Median EV/TTM valuation
2008 $159m 1.4x
2007 $701m 2.6x
2006 $393m 2.1x
2005 $346m 2.3x

Source: The 451 M&A KnowledgeBase