Category: technology stocks

Salesforce.com for sale?

Brenon Daly2 Comments

Ever since Barack Obama won the US presidential election two weeks ago, Silicon Valley has started its own little parlor game about the incoming administration. (And make no mistake, the Valley is one of the most insular places on the planet, which makes these guessing games fun for those in certain zip codes.)

The specific gossip? Who will fill the cabinet-level position of CTO that Obama promised to create while campaigning. Early conjecture centered on Google’s Eric Schmidt, who recently replied, ‘Not it.’ Over the weekend, The Wall Street Journal reported that Oracle’s top lieutenant Chuck Phillips may be in the mix. (Phillips already did a stint of public service in the US Marines before diving into the public markets.)

We cite the rumor-mongering about Oracle’s president because we want to add our own bit of wild speculation: If Phillips leaves Oracle, a deal for Salesforce.com will move closer. We understand from a number of sources that Phillips has effectively vetoed a purchase of the on-demand CRM vendor, even though CEO Larry Ellison has indicated several times that he’d like to pick up the company, if just to jump-start Oracle’s own software-as-a-service (SaaS) offering. (An acquisition would also help Oracle widen the gap with rival SAP, which has stumbled with its own SaaS offering for midmarket companies, which it calls Business ByDesign.)

Of course, we still like Google as a buyer for Salesforce.com. That’s even more the case since the company has seen its stock price cut in half over the past year. (It sports a current market capitalization of $3.1bn, compared to projected sales in the current fiscal year of $1bn.) Wall Street will get an update of Salesforce.com’s business on Thursday, when it reports fiscal third-quarter results. Sales for the quarter are expected to come in at about $275m.

Market imbalance

Brenon Daly

The markets are shrinking. And we’re not just referring to the trillions of dollars of value that have been lost from the New York Stock Exchange and the Nasdaq over the past year. Instead, we’re talking about the actual number of companies on the markets.

Listings rise and fall over the years, as companies go public or get acquired. At least, they do in normal years. But in a year like 2008, with black swans flying across the sky, the number of listings just falls (rather like the prices of the stocks that remain on the exchanges). Already this year, we’ve seen some 62 US publicly traded companies get acquired. On the other side of the ledger, we’ve had fewer than 10 technology IPOs since January. (And don’t look for Metastorm, which filed to go public in mid-May, to debut on the Nasdaq anytime soon. The company pulled its planned offering on Thursday.)

In terms of M&A dollars, as you might guess given the state of the markets, the companies that trade on them have been sharply marked down, as well. While the number of deals has dropped 27%, the value of those deals has plummeted twice that amount (56%). In addition, spending on public company deals has declined even more than the overall tech M&A market, which has sunk about 40% in terms of dollars spent so far this year.

Acquisitions of US public companies

Period Deal volume Deal value
January 1-November 14, 2007 85 $250bn
January 1-November 14, 2008 62 $109bn

Source: The 451 M&A KnowledgeBase

Betting on casual gaming

-by Thomas Rasmussen

Casual gaming is a serious business. Amid a decline in M&A across the overall gaming industry, casual gaming acquisitions are trending up slightly. So far this year there have been 28 social and casual gaming deals inked, which compares to 25 for all of last year. This is in stark contrast to a sharp decline of more than 30% in tech and gaming M&A in general. What might the reason be for this and what does it portend for the year to come?

The past month has authoritatively invalidated a long-held belief by those in the gaming industry: It is not a recession-proof sector. In fact, lackluster earnings from Electronic Arts (EA) and others have the industry anxious. EA posted a negative EBITDA of $310m, provided dire forecasts and announced across-the-board job cuts for the most recent quarter ended September 30. The bright spot, however, is the continuing growth in casual gaming among not only the big videogame companies such as EA, but other companies, as well. For instance, RealNetworks’ recent third-quarter earnings report boasts another 20% increase in its gaming business compared to last quarter. As the casual gaming industry continues to be seen more as a viable business model, we expect the shopping to continue for not only the gaming conglomerates, but also for large media companies looking to get in the game. Amazon’s recent acquisition of Reflexive Entertainment is an example of new acquirers shopping in the space.

Not that it is a hard trend to spot, but for what it’s worth, VCs, angels and serial entrepreneurs have been touting this development to us all year, and are putting their money where their mouths are. Among some of the startups to receive sizable funding recently are Playfish, which raised a $17m series B round last month for a total of $21m to date; Social Gaming Network Inc, which has won about $20m in funding so far; and Zynga Game Network, which has taken in $39m. That is a lot of money for companies in an industry previously regarded as a niche. And given the heavy consolidation experienced in the traditional gaming industry, all of these vendors are likely to be part of the many names mentioned in M&A chatter in the near future.

Push-back on the markdown

Brenon Daly

Rather than the current M&A market being a place where buyers and sellers meet on more or less equal footing, current deals clearly show that acquirers have the upper hand (if you’ll forgive the mixed anatomical metaphor). We’ve already noted how some would-be buyers have pushed for ‘recalibrations’ in deal prices and, for the most part, have gotten these discounts.

However, one target isn’t just sitting by for a markdown. I2, which agreed to be acquired by JDA Software Group in mid-August, has told its bargain-minded buyer that it plans to hold to the original terms of the deal. Under those terms, i2’s common shareholders would pocket $14.86 for each share. (There are also payments to satisfy i2 convertible holders, giving the proposed transaction an enterprise value of $346m.)

I2 shares traded close to the bid up until Wednesday, when JDA told i2 it wanted the company to delay its shareholder vote. I2 went ahead and held the meeting as scheduled Thursday, with more than 80% of shareholders voting for the deal. The company says it has done everything it needed to do to close the deal and ‘expects’ JDA to do the same. The market doesn’t share that expectation. Instead, it anticipates that JDA will trim its bid. I2 shares dropped $4 on Wednesday and sank again on Thursday, closing at $9. That’s almost 40% below the original offer price. In case anyone is curious, terms call for a breakup fee of $15m or $20m, depending on the split.

Credit crisis hits home for VeriSign

-by Thomas Rasmussen

In VeriSign’s 3rd quarter earnings conference call last night, interim CEO Jim Bidzos detailed its divesture progress. The gist: There is none.

It was essentially a repeat of its second quarter call. Bidzos insists that it is “this” close. He reiterated that one of the three non-core businesses is close to being divested, possibly before the end of the year (our money is on Communications). Bidzos offered up the reason for the holdup: The would-be acquirer needs financing. This is yet another unfortunate example of frozen credit markets hampering M&A.

Barack Obama meets Bluto and Otter

Brenon Daly2 Comments

Just after Barack Obama was elected to the White House, a website devoted to him got moved into Animal House. A few months ago, National Lampoon took a small flier into politics, buying BarackObamaJokes.com. On Wednesday, the day after America elected Obama to the nation’s highest post, the aspiring comedy conglomerate revealed that it had closed the deal. (Although terms weren’t disclosed, we guess the transaction cost National Lampoon less than $10,000.)

National Lampoon’s purchase of BarackObamaJokes.com continues its transformation from essentially a licensing business to a company with actual operations. It has done that largely through acquisitions, picking up a half-dozen Web humor sites so far this year. That flurry of dealmaking has pushed the ‘new media’ portion of National Lampoon’s overall revenue to 20%. The company plans to at least double that level within three years. (Incidentally, National Lampoon, perhaps best known for the film Animal House, is a publicly traded company. No joke. It currently sports a market capitalization of just $8m, but only trades some 9,000 shares in a typical day on the Amex.)

In the interest of a ‘fair and balanced’ account of our White House election M&A report, we also tracked down the guy who owns JohnMcCainJokes.com. The first thing he told us is that he also has a hand in HillaryClintonJokes.com and was going to register BarackObamaJokes.com, but ‘spaced’ on it. As for JohnMcCainJokes.com, which is little more than a placeholder, the owner says he hasn’t received any M&A overtures for the site.

National Lampoon’s 2008 acquisitions

Date Target
November 5 BarackObamaJokes.com
September 4 ZingFu Enterprises
August 19 AllModelZone.com
February 11 Comedy Express (assets)
February 4 Rivalfish
January 9 College Hangover

Source: The 451 M&A KnowledgeBase

A Freudian deal?

Brenon Daly

We’ve run a lot of different analyses on transactions, but AccessData’s proposed acquisition of Guidance Software is the first one we’ve ever subjected to Freudian analysis. What do we mean? Well, almost all of the executives at AccessData, a private data forensics software vendor, used to work at publicly traded Guidance. (AccessData’s CEO, COO and two VPs are former employees of the company they are now bidding on.)

After its initial bid a month ago was rebuffed, AccessData took public on Tuesday its offer of $4.50 for each share of Guidance. With about 23 million shares outstanding, the proposed transaction values Guidance at about $105m. However, debt-free Guidance holds $28m in cash, lowering the enterprise value of the bid to about $77m. Guidance is expected to record about $90m in sales this year. In comparison, AccessData is about one-third that size, primarily because it doesn’t have any services revenue.

We understand AccessData, which has never taken outside funding, plans to finance the deal internally, if it goes through. Guidance has rejected the bid. And, although AccessData has threatened to take its unsolicited proposal directly to shareholders, a tender offer is unlikely to go through unless it gets the blessing of one Guidance executive: Chairman and CTO Shawn McCreight, who founded the company and owns some 44% of its stock. If nothing else, AccessData’s bid will make Guidance’s third-quarter conference call on Thursday more interesting.

Google and Yahoo break up

-by Thomas Rasmussen

The Department of Justice announced this morning that it would file suit to block the planned advertising pact between Google and Yahoo. Google followed quickly by axing the deal. YHOO is up 8% in mid-day trading while the overall market is down sharply. The Google/Yahoo breakup has sparked renewed hope among shareholders that Microsoft could return to the table. It also opens up the possibility of a long rumored partnership between Time Warner’s AOL and Yahoo.

RFMD takes a timeout

-by Thomas Rasmussen

RF Micro Devices is taking a break from M&A. The radio frequency semiconductor company told us after an investor conference last week that it will sit on the sidelines until at least the second quarter of 2009. The pause comes after a pair of tuck-ins (its $25m acquisition of Filtronic’s semiconductor business and its $24.1m purchase of Universal Microwave) and its $900m bet on Sirenza Microdevices late last year. The company plans to use the next six months to digest its earlier acquisitions.

As it holds off on inorganic growth, RFMD may need to focus on organic growth. Revenue has flatlined at about $1bn in the company’s past two fiscal years and it has lost money in three of its last four quarters. Meanwhile, its cash flow has dried up substantially. In its most-recent four quarters (ending June 30), RFMD reported negative EBITDA of $8m, which is down from a positive EBITDA of $175m in the year-earlier period. That slump has weighed on shares, which have shed two-thirds of their value so far this year. And that has not only cost the company, it has also cost the shareholders of Sirenza, who took two-thirds of their payment in RFMD shares.

Less of the same for October M&A

Brenon Daly

With October standing as the worst month for the Dow Jones Industrial Average in more than a decade, we thought we’d see what the market’s rout did to M&A totals. Essentially, October continued the sluggishness that we’ve already seen in the first three quarters of 2008, with M&A falling about one-third from October 2007. (See our full report on Q1-Q3 activity.) And while the drop in dealmaking seems sharp, it pales in comparison to the losses on Wall Street, at least on a relative basis. Consider this: the October declines of the Dow and the Nasdaq (14% and 18%, respectively) account for exactly half of the total losses for both indexes in 2008. Ouch.

Also similar to the first three quarters of the year, big buyers sat out October. Only three transactions valued at more than $1bn were announced last month. (And, we’d be quick to add, one of them – the $2.3bn unsolicited bid for Atmel – has been rejected and, if history is any guide, probably won’t go through.)

Even with the continued bearishness in the M&A markets, the activity in October does offer a glimmer of hope for the return of a vibrant deal economy. At least things didn’t get worse. And if things continue to not get worse, it’s not too much of a stretch to see them starting to get better.

October deal flow

Month Deal volume Deal value Deals worth $1bn+
October 2006 330 $37bn 8 (Google-YouTube, Open Solutions LBO)
October 2007 309 $32bn 5 (Nokia-Navteq; SAP-Business Objects)
October 2008 238 $23bn 3 (CenturyTel-Embarq, unsolicited bid for Atmel)

Source: The 451 M&A KnowledgeBase